SMG Industries Inc. - Annual Report: 2022 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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OR

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Commission File Number 000-54391

SMG INDUSTRIES INC.

(Exact name of registrant as specified in its charter)

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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No   ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.  Yes   ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period the registrant was required to submit such files). Yes   ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’sassessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☐

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ☐   No ☒

The aggregate market value of the registrant’s common stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of June 30, 2022 was $4,281,560.

The number of shares of the registrant’s common stock outstanding as of April 17, 2023 was 47,739,284.

Documents Incorporated by Reference

None

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SMG Industries Inc.

Annual Report on Form 10-K

For the Year Ended December 31, 2022

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Cautionary Statement Regarding Forward-Looking Statements

Unless otherwise indicated, the terms “SMG Industries,” “SMG,” the “Company,” “we,” “us,” and “our” refer to SMG Industries Inc. In this Annual Report on Form 10-K, we may make certain forward-looking statements, including statements regarding our plans, strategies, objectives, expectations, intentions and resources that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Annual Report on Form10-K contains such “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be made directly in this Annual Report, and they may also be made a part of this Annual Report by reference to other documents filed with the SEC, which is known as “incorporation by reference.”

The statements contained in this Annual Report on Form 10-K that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intends,” “continue,” or similar terms or variations of those terms or the negative of those terms.  All forward-looking statements are management’s present expectations of future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief or current expectations of SMG Industries Inc. Forward-looking statements are merely our current predictions of future events. Investors are cautioned that any such forward-looking statements are inherently uncertain, are not guaranties of future performance and involve risks and uncertainties. Actual results may differ materially from our predictions. There are a number of factors that could negatively affect our business and the value of our securities, including, but not limited to, fluctuations in the market price of our common stock; changes in our plans, strategies and intentions; changes in market valuations associated with our cash flows and operating results; the impact of significant acquisitions, dispositions and other similar transactions; our ability to attract and retain key employees; changes in financial estimates or recommendations by securities analysts; asset impairments; decreased liquidity in the capital markets; and changes in interest rates. Such factors could materially affect our Company’s future operating results and could cause actual events to differ materially from those described in forward-looking statements relating to our Company. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor is there any assurance that we have identified all possible issues that we might face.

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this Annual Report on Form 10-K or in any document incorporated by reference might not occur. Stockholders are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K or the date of the document incorporated by reference in this Annual Report on Form 10-K, as applicable. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by applicable law. All subsequent forward-looking statements attributable to the Company or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We urge readers to carefully review and consider the various disclosures we make in this report and our other reports filed with the SEC that attempt to advise interested parties of the risks, uncertainties and other factors that may affect our business including the risk factors included herein under Item 1A “Risk Factors.”

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PART I

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We are a growth-oriented Transportation Services company focused on the domestic logistics market. Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy and Build growth strategy of acquiring transportation companies and generating organic growth post-acquisition when possible, by removing business constraints and strategic cross-selling of services in an effort to raise equipment utilization and grow market share. We believe our business focus and equipment fleet position us to be a growing participant in the domestic United States infrastructure market.

Our wholly-owned operating subsidiaries are:

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Together, we commonly refer to the above as the “5J Transportation Group”.

Our operating subsidiaries provide a range of services in transportation, such as:

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We are headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina. Our web sites are www.5J-Group.com and www.SMGIndustries.com.

Our Corporate History and Background

We were incorporated under the laws of the State of Delaware on January 7, 2008. From inception through December 31, 2014, our primary business purpose was to stockpile indium, a specialty metal that is used as a raw material in a wide variety of consumer electronics manufacturing applications. As of December 31, 2014, we sold all the indium from our stockpile. As a result, at such time we were no longer in the business of purchasing and selling indium. In 2015, our Board of Directors approved a cash distribution to our stockholders and a share repurchase program. After completion of the cash distribution and the share repurchase program the Company sought a new growth platform and focused on its current strategy of acquiring and growing operating businesses.

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Domestic Industry Overview by Business line

Transportation Services Business

Heavy Haul

A heavy haul or oversize load is a load that exceeds the standard or ordinary legal size and/or weight limits for a truck to convey on a specified portion of road, highway, or other transport infrastructure. Also, a load that exceeds the per-axle limits, but not the overall weight limits, is considered overweight. Examples of oversize/overweight loads include construction machines (cranes, front loaders, backhoes, etc.), wind energy components such as blades, production equipment used in energy, midstream natural gas compressors, pre-built homes, power generation components, containers, and infrastructure elements (such as bridge beams and industrial equipment).

Super Heavy Haul

A super heavy haul is a permit-required over-dimensional load that typically exceeds 254,000 pounds gross vehicle weight and requires specialized equipment. Examples of this type of load include refinery components, boilers, slug catchers, vessels, large natural gas compressors, large wind components for renewable energy, and transformers for the power industry.

Drilling Rig Mobilization

Moving a drilling rig involves mobilization of the rig’s substructure, derrick, power generation and mud and pumping equipment, and drill pipe. Typically, jobs are quoted in ten-mile increments with most mobilizations within a one-hundred mile radius. These moves can include cold stack rigs coming out of storage into the field.

Commodity Freight

Legal loads not requiring permits that include mining and drilling equipment, lumber, pipe, heavy equipment, heavy machinery, coil tubing, steel, solar panels, and generators.

Freight Brokerage

Brokerage services are utilized when an existing, or new customer has logistics needs that exceed our current scope of services or equipment and we arrange for a carrier on their behalf. This service line was recently integrated in-house in lieu of outsourcing brokerage services to a third party to raise the value to our customers.

Driveaway Services

Providing safe and dependable vehicle transport services for manufactures, dealers and other companies. Services include pickup and delivery of many classes of trucks including tractors, cab and chassis, motorized RVs, and utility trucks.

Company Strategies

Diversify Transportation Service Offerings

Our strategy of developing or adding additional lines of service such as heavy haul of bridge beams and wind energy components continue to diversify our business and provide enhanced service offerings to our customers. Recent examples include the December 2021 formation of our brokerage logistics subsidiary in Fort Mill, South Carolina with operations throughout the domestic United States that further diversified our business and customer base. Given the volatility of hydrocarbon prices and its affect on upstream oil and gas (“O&G”) customer activity, this diversification strategy assists in the drilling rig mobilization services which was a legacy offering of the Company. Strategically, we have pivoted over the last few years in an attempt to reduce concentration in the O&G markets by focusing on the infrastructure business of hauling bridge beams, wind energy components and power transformers. We believe we will likely continue to have exposure in the upstream O&G market given the geography and customers we serve, and as such, our strategy is to reduce the overall percentage to a minority share of our total business assisted by acquisitions of other transportation companies, if consummated, and organically establishing additional lines of business.

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Buy and Build for Company Growth

Our strategy involves growth resulting from making acquisitions of private lower or middle-market size transportation services and related businesses operating in the domestic United States with a plan to grow an acquired company post-acquisition. Our management team seeks to identify companies that have good reputations and customers, and complementary service lines. We plan for additional growth, post-acquisition, of these targets by identifying business constraints which can be removed once acquired by us. These business constraints typically can be a lack of equipment, working capital, systems, sales force or MSAs and customer agreements. This strategy differs, in management’s view, from a “roll-up” as we do not make acquisitions just for cost saving synergies from elimination of duplicate personnel, consolidation of facilities, etc., but rather by adding personnel, capital and customers for anticipated future growth.

The acquisition of 5J in February 2020 added approximately 460 tractors, trailers, cranes and forklift fleet of equipment to offer heavy haul, super heavy haul, drilling rig mobilization and commodity freight services.

Add Owner Operator Trucking Companies to Enhance Transportation Business

In our experience, independent trucking company fleets with less than 100 tractors/drivers, it can be customary to ‘lease on’ with a larger transportation firm benefitting from their back-office infrastructure, insurance policies and access to additional ancillary equipment. 5J has historically sought a balance between company owned tractors, drivers and equipment and owner/operators who have leased-on to 5J’s operating authority. We have enhanced our fleet with approximately 100 tractors through several owner operators that have leased-on representing approximately 49% of our total fleet offering. Our revenue share lease allows our owner/operators of this described size to operate more efficiently, and we do not have to carry their assets and fixed overhead creating a balance for our transportation business.

Expand Service Offerings within Existing Customers

We currently have over 600 customers, many of which are leading companies in their respective fields. Our strategy is to deepen our relationship with those customers by expanding our service offerings with them. As an example, our logistics brokerage division can utilize our drivers verses third party drivers for jobs from time to time. Additionally, a super heavy haul load many times has additional components and items that are hauled with our flatbed services expanding the “wallet share” with a customer.

Our company headquarters are located in Houston, Texas.

Sales Plan

The Company’s sales plan includes utilizing employed sales personnel based in our various locations that are engaged to generate sales. Our sales personnel are typically compensated on a fixed base salary plus performance incentives. We also engage commission-only salespersons from time to time to supplement the main employee-based sales force. We believe transportation services is a relationship-based business where sales relationships are important as well as safety record, equipment fleet profile and the quality of our employed and commission-based salespersons.

Safety

Our Company emphasizes a safety-focused culture and conducts mandatory orientations for all of its drivers and includes safety moments in its weekly staff meetings. The U.S. Department of Transportation (DOT) requires that the Company perform drug and alcohol testing that meets DOT regulations, and our safety program includes pre-employment, random and post-accident drug testing and all other testing required by the DOT. The Company also utilizes safety in the field programs on a customary basis.

Employees

As of December 31, 2022, we had 269 employees of whom 21 were administrative, 9 were in sales and marketing and 239 were in service or operations. In addition, we may employ independent contractors from time to time. Our employees are not represented by a labor union, and we believe our relations with our employees are satisfactory. Our independent contractors are either paid day rates or hourly commensurate with the job. Employees and independent contractors are required to execute agreements with us that set forth terms of engagement and contain customary confidentiality and non-competition provisions.

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Corporate Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and beneficial ownership reports on Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act have been filed with the Securities and Exchange Commission (SEC). Such reports and other information that we file with the SEC are available on our website at www.SMGIndustries.com when such reports are filed with the SEC. Copies of this Annual Report on Form 10-K may also be obtained without charge electronically or by paper by contacting SMG Industries Inc. by calling (713) 955-3497.

The public may also read and copy the materials we file with the SEC at its Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at http://www.sec.gov that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. References to our website and the SEC’s website are intended to be inactive textual references and the contents of these websites are not incorporated into this filing.

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Investing in our securities involves a high degree of risk. Before purchasing our common stock, you should carefully consider the following risk factors as well as other information contained in this Annual Report, including our financial statements and the related notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our securities could decline, and you may lose some or all of your investment.

Risks Related to Our Business

The COVID-19 pandemic has significantly reduced demand for our services, and has had, and may continue to have, a material adverse impact on our financial condition, results of operations and cash flows.

The effects of the COVID-19 (coronavirus) pandemic and related variants, including actions taken by businesses and governments, have resulted in a significant and swift reduction in international and U.S. economic activity. These effects have adversely affected the demand for oil and natural gas, as well as for our services. The collapse in the demand for oil caused by this unprecedented global health and economic crisis, has had, and should the pandemic continue, is reasonably likely to continue to have, a material adverse impact on the demand for our services. The decline in our customers’ demand for our services could continue to have a material adverse impact on our financial condition, results of operations and cash flows.

While the full impact of the COVID-19 pandemic and related variants is not yet known, we are closely monitoring the effects of the pandemic on market demands, our customers, and our operations and employees. These effects have included, and may continue to include, adverse revenue and cash flow effects; disruptions to our operations; customer shutdowns of oil and gas exploration and production; employee impacts from illness, school closures and other community response measures; and temporary closures of our facilities or the facilities of our customers and suppliers.

The extent to which our operating and financial results are affected by COVID-19 and related variants will depend on various factors and consequences beyond our control, such as the duration and scope of the pandemic; additional actions by businesses and governments in response to the pandemic; and the speed and effectiveness of responses to combat the virus. COVID-19, and the volatile regional and global economic conditions stemming from the pandemic, could also aggravate the other risk factors set forth below. COVID-19 may also materially adversely affect our operating and financial results in a manner that is not currently known to us or that we do not currently consider significant risks to our operations.

Inadequate liquidity could materially and adversely affect our business operations.

We have significant outstanding indebtedness under our credit facilities. As of December 31, 2022, we had fully drawn the availability under our credit facility. Due to this limited liquidity we may not be able to provide our services, which could lead to continued deterioration in our financial condition. Our ability to pay interest and principal on our indebtedness and to satisfy our other obligations will depend upon our ability to achieve increased utilization of our equipment, which is highly influenced by our customers

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capital expenditures and activity. We cannot assure that our business will generate sufficient cash flows from operations, or that future capital will be available to us in an amount sufficient to fund our liquidity needs. We cannot assure you that we will be able to raise capital through debt or equity financings on terms acceptable to us or at all, or that we could consummate dispositions of assets or operations for fair market value, in a timely manner or at all. Furthermore, any proceeds that we could realize from any financings or dispositions may not be adequate to meet our debt service or other obligations then due.

The loan agreement and line of credit facility pledges all of the 5J Transportation Group’s accounts receivable to Amerisource Funding Inc.

In connection with SMG’s acquisition of 5J, each of 5J Oilfield Services and 5J Trucking entered into a revolving accounts receivable assignment and term loan financing and security agreement with Amerisource Funding Inc. Additionally, in September 2021, the 5J Transportation Group entered into a loan agreement with Amerisource Funding Inc. Pursuant to the terms of the loan agreement and the line of credit agreement, Amerisource has been granted a first lien on all of the accounts receivable and other personal property of the 5J Transportation Group, other than 5J Driveaway which was formed subsequent to the loan and line of credit agreement. In the event that the 5J Transportation Group was unable to comply with the payment terms of the Amerisource loan and/or the accounts receivable agreement, Amerisource could terminate the accounts receivable facility or declare the loan to be in default with the 5J Transportation Group in an effort to seek repayment under the terms of the agreements. If Amerisource were successful, we would be unable to borrow working capital funds and operate our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected. Additionally, we have guaranteed the Amerisource financing facility on behalf of our subsidiaries who are the borrowers.

The interest rate on a significant portion of our indebtedness varies with the market rate of interest. An increase in the prime interest rate could have a material adverse effect on our interest expense and our results of operations.

The interest on our lines of credit and term loans are payable monthly and are at rates per annum equal to the prime rate plus a range of 6% or more. The interest under our credit facilities will fluctuate over time, and if the prime rate significantly increases, our interest expense will increase. This could have a material adverse effect on our results of operations.

We most likely will need additional financing to further our business plans.

We believe we will require additional funds to finance our business development projects. We may not be successful in raising additional financing as and when needed. If we are unable to obtain additional financing in sufficient amounts or on acceptable terms, our operating results and prospects could be adversely affected. Our ability to raise new debt or equity capital or to refinance or restructure our debt at any given time depends, among other things, on the condition of the capital markets and our financial condition at such time. Also, the terms of existing or future debt or equity instruments could further restrict our business operations. The inability to finance future growth could materially and adversely affect our business, financial condition and results of operations.

Our recurring losses from operations could continue to raise substantial doubt regarding our ability to continue as a going concern. Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations.

We have sustained losses from operations during each of the last two years, which as of December 31, 2022, accumulated to $44,642,776, including an operating loss of $3,012,244 and $8,934,649 for the years ended December 31, 2022 and 2021, respectively. Accordingly, our auditor has concluded that substantial doubt exists regarding our ability to continue as a going concern. Our audited consolidated financial statements appearing at the end of this Annual Report have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the ordinary course of business. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of these uncertainties related to our ability to operate on a going concern basis. In its report on our consolidated financial statements for the years ended December 31, 2022 and 2021, our independent registered public accounting firm included an explanatory paragraph stating that our recurring losses from operations and net capital deficiency raise substantial doubt about our ability to continue as a going concern. The perception that we may not be able to continue as a going concern may cause others to choose not to deal with us due to concerns about our ability to meet our contractual obligations, which would have a material adverse effect on our operations.

Our ability to continue as a going concern requires that we obtain sufficient funding to finance our operations. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely

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affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited financial statements, and it is likely that investors will lose all or a part of their investment. If we seek additional financing to fund our business activities in the future and there remains substantial doubt about our ability to continue as a going concern, investors or other financing sources may be unwilling to provide additional funding to us on commercially reasonable terms or at all.

We are currently in a very difficult operating environment.

We faced a very difficult operating environment in 2022 and believe it could continue into 2023, with labor shortages, the reduced but continued economic effects of the global COVID pandemic and working capital business liquidity constraints can from time to time make it a challenge for us to provide services. We cannot give any assurances about possible future pandemics, their effects on the economy or our business. We cannot give any assurances that we will raise future capital to provide more additional working capital and liquidity, and on terms acceptable to us, if at all. Due to liquidity constraints from time to time, we may be forced to curtail operations in some or all of our locations which would materially and adversely affect our revenues and operations.

Our business depends in part on domestic (United States) spending by the crude oil and natural gas industry which suffered significant price volatility in 2021 and 2022, and such volatility may continue; our business has been, and may in the future be, adversely affected by industry and financial market conditions that are beyond our control.

While our Company generally benefitted from increased oil and gas prices in the United States in fiscal year 2022 compared to the previous year, we are trying to reduce the percentage of revenues and activity received from upstream oil and gas customers over time. If future hydrocarbon prices decline, it could have a negative effect on our business as customers would potentially reduce their operating and capital expenditures which would reduce demand for our services.

Industry conditions and specifically the market price for crude oil and natural gas are influenced by numerous domestic and global factors over which the Company has no control, such as the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, weather conditions, political instability in oil and natural gas producing countries, and merger and divestiture activity among oil and natural gas producers. The volatility of the oil and natural gas industry and the consequent impact on commodity prices as well as exploration and production activity could adversely impact the level of drilling and activity by some of our customers.

There have also been significant political pressures for the United States economy to reduce its dependence on crude oil and natural gas due to the perceived impacts on climate change. These activities may make oil and gas investment and production less attractive.

Higher oil and gas prices do not necessarily result in increased drilling activity because our customers’ expectation of future prices also drives demand for drilling services. Oil and gas prices, as well as demand for the Company’s services, also depend upon other factors that are beyond the Company’s control, including the following:

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Ongoing volatility and uncertainty in the domestic and global economic and political environments have caused the oilfield services industry to experience volatility in terms of demand. While our management is generally optimistic for the continuing development of the onshore North American oil and gas industry, there are a number of political and economic pressures negatively impacting the economics of continuing production from some existing wells, future drilling operations, and the willingness of banks and investors to provide capital to participants in the oil and gas industry. These cuts in spending will continue to curtail drilling programs as well as discretionary spending on well services and will continue to result in a reduction in the demand for the Company’s services, the rates and equipment utilization can be charged. In addition, certain of the Company’s customers could become unable to pay their suppliers, including the Company. Any of these conditions or events could adversely affect our operating results.

The Company’s contractual agreements with its owner-operators expose it to risks that it does not face with its company drivers.

Approximately 49% of the Company’s revenue was carried by owner-operators in 2022. The Company’s reliance on independent owner-operators creates numerous risks for the Company’s business. For example, the Company from time to time provides financing to certain of its independent owner-operators purchasing tractors from the Company. If owner-operators operating the tractors the Company financed default under or otherwise terminate the financing arrangement and the Company is unable to find a replacement owner-operator, the Company may incur losses on amounts owed to it with respect to the tractor in addition to any losses it may incur as a result of idling the tractor. Further, if the Company is unable to provide such financing in the future, due to liquidity constraints or other restrictions, the Company may experience a shortage of owner-operators.

If the Company’s independent owner-operators fail to meet the Company’s contractual obligations or otherwise fail to perform in a manner consistent with the Company’s requirements, the Company may be required to utilize alternative service providers at potentially higher prices or with some degree of disruption of the services that the Company provides to customers. If the Company fails to deliver on time, if its contractual obligations are not otherwise met, or if the costs of its services increase, then the Company’s profitability and customer relationships could be harmed. Furthermore, independent owner-operators typically use tractors, trailers and other equipment bearing the Company’s trade names and trademarks. If one of the Company’s independent owner-operators is subject to negative publicity, it could reflect on the Company and have a material adverse effect on the Company’s business and brand. Under certain laws, the Company could also be subject to allegations of liability for the activities of its independent contractor owner-operators.

Owner-operators are third-party service providers, as compared to company drivers who are employed by the Company. As independent business owners, the Company’s owner-operators may make business or personal decisions that conflict with the Company’s best interests. For example, if a load is unprofitable, route distance is too far from home or personal scheduling conflicts arise, an owner-operator may deny loads of freight from time to time. In these circumstances, the Company must be able to timely deliver the freight in order to maintain relationships with customers. In addition, adverse changes in the financial condition of the Company’s independent contractor owner-operators or increases in their equipment or operating costs could cause them to seek higher revenues. The prices the Company charges its customers could be impacted by such issues, which may in turn limit pricing flexibility with customers.

We operate in a highly cyclical industry which could adversely affect our results of operations.

We operate in a highly cyclical industry. A key factor driving demand for our industrial services is the level of economic activity with domestic oil and gas companies, which in turn depends largely on current and anticipated future crude oil and natural gas prices and production depletion rates. Global supply and demand for oil and the domestic supply and demand for natural gas are critical in assessing industry outlook. Demand for oil and natural gas is cyclical and subject to large, rapid fluctuations. Producers tend to increase capital expenditures in response to increases in oil and natural gas prices, which generally results in greater revenues and profits for oilfield service companies such as ours. Increased capital expenditures also ultimately lead to greater production, which historically has resulted in increased supplies and reduced prices, which in turn tend to reduce activity levels for oilfield services. Midstream or pipeline operating companies typically utilize service companies in their construction, build out or maintenance of their infrastructure they operate and manage. Midstream operators also have cyclical capital spending where area activity and hydrocarbon prices may have an effect on new project economics that may result in delays or elimination of project expenditures. Heavy haul logistics and transportation typically includes a material amount of oilfield production equipment as such is cyclical in nature.

Additionally, weather conditions affect the demand for, and prices of, oil and natural gas and, as a result, demand for our services. Demand for oil and natural gas is typically higher in the fourth and first quarters due to harsh northern climates, resulting in higher prices.

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For these reasons, the results of our operations may fluctuate from quarter to quarter and year to year. These fluctuations may distort comparisons of results across periods.

We depend on several significant customers, and a loss of one or more significant customers could adversely affect our results of operations.

The Company serves several major drilling companies and independent oil & gas companies that are active in our core areas of operations. Additionally, project-based engineering firms can provide large, concentrated revenue opportunities that can provide a large swing in revenues that are managed on intra-year basis.

As of December 31, 2022, one customer accounted for 14% of our accounts receivable balance. During the twelve-month period ended December 31, 2022, no customers represented 10% or more of our revenues.

These customers do not have any ongoing commitment to purchase our services. While additional customers have been sourced since December 31, 2022, customer concentration risk still exists. The loss of or a sustained decrease in demand by these customers could result in a substantial loss of revenues and could have a material adverse effect on our results of operations. In addition, should these large customers default in their obligations to pay, our results of operations and cash flows could be adversely affected.

The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.

Our success is largely dependent on the skills, experience, and efforts of our management team. We currently depend on the continued services and performance of the key members of our management team, including Steven Madden, our Chief Transition Officer, Matthew Flemming, our Interim Chief Executive Officer, Interim Chief Financial Officer and Chief Business Development Officer and James Frye, our President of 5J Transportation Group operating division. Mr. Frye, in connection with our acquisition of 5J, entered into a three-year employment agreement with 5J, with automatic one-year renewals after the initial term. However, the loss of any such key personnel could result in a disruption to the operations of the 5J Transportation Group. The loss of key personnel could disrupt our operations and have an adverse effect on our ability to grow our business if we are unable to replace them.

We operate in a highly competitive environment, which could adversely affect our sales and pricing.

The markets in which we operate are highly competitive. We provide services primarily in the southwest United States. Our competitors include many large and small transportation, logistics, and other service companies. In addition, the transportation services business in which we compete is highly fragmented. We believe that the principal competitive factors in the markets we serve are reputation for high quality service and technical expertise, good equipment, trained personnel, work force competency, safety record and price. Competing firms may have their own service personnel, in which case we may not get awarded an available service job. While we seek to be competitive in our pricing, we believe many of our customers elect to work with us based on safety and performance and quality of our crews, equipment, and services. We seek to differentiate ourselves from our competitors by delivering the highest quality service, experienced personnel, and equipment possible, coupled with execution and operating efficiency in a safe working environment.

We expect competition to intensify in the future. There can be no assurance that we will be able to compete successfully with other companies. Thus, revenues could be reduced due to aggressive pricing pursued by competitors. Many of our competitors are entities that are more established, larger and have greater financial and personnel resources than we do. If we do not compete successfully, our business and results of operations will be materially adversely affected.

While our growth strategy includes seeking acquisitions of other transportation services and logistics companies, we may not be successful in identifying or making any acquisitions in the future. We may not realize all of the anticipated benefits of our acquisitions, joint ventures or divestitures, or these benefits may take longer to realize than expected.

Our business strategy includes growth through the acquisitions of other businesses in the areas of logistics and transportation services. We may not be able to continue to identify attractive acquisition opportunities or successfully acquire those opportunities that are identified. There is always the possibility that even if there is success in integrating our current or future acquisitions into the existing operations, we may not derive the benefits, such as administrative or operational synergy or earnings obtained, that were expected from such acquisitions, which may result in the commitment of capital resources without the expected returns on the capital. The competition

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for acquisition opportunities may increase which in turn would increase our cost of making further acquisitions or causing us to curb our activities of making additional acquisitions.

In pursuing our business strategy, from time to time we evaluate targets and enter into agreements regarding possible acquisitions, divestitures, and joint ventures. To be successful, we conduct due diligence to identify valuation issues and potential loss contingencies, negotiate transaction terms, complete transactions, and manage post-closing matters such as the integration of acquired businesses. Our due diligence reviews are subject to the completeness and accuracy of disclosures made by third parties. We may incur unanticipated costs or expenses following a completed acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, litigation, and other liabilities.

The risks associated with our future acquisitions also include the following:

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We believe that we have sufficient resources to integrate these acquisitions successfully, such integration involves a number of significant risks, including management’s diversion of attention and resources. There can be no assurance as to the extent to which the anticipated benefits of these acquisitions will be realized, if at all, or that significant time and cost beyond that anticipated will not be required with the integration of new acquisitions to the existing business. If we are unable to accomplish the integration and management successfully or achieve a substantial portion of the anticipated benefits of these acquisitions within the time frames anticipated by management and within budget, it could have a material adverse effect on our business.

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and attention. They may also delay the realization of the benefits we anticipate when we enter into a transaction. Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have an adverse effect on our business, financial condition and results of operations.

We are vulnerable to the potential difficulties associated with rapid growth

We believe that our future success depends on our ability to manage the rapid growth that we expect to experience organically and through acquisitions. Our anticipated growth will place additional demands and responsibilities on our management to maintain existing customers and attract new customers, recruit, retain and effectively manage employees, as well as expand operations and integrate customer support and financial control systems. The following could present difficulties:

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If we are unable to manage our expected future growth, our business could be materially adversely affected.

We are subject to a wide range of government regulations that could adversely affect our business

The Company’s operations are regulated and licensed by various federal, provincial, state, local and foreign government agencies in the United States and Canada. In the United States, the Company and its drivers must comply with the safety and fitness regulations of the DOT and the agencies within the states that regulate transportation, including those regulations relating to drug- and alcohol-testing and hours-of-service. Weight and equipment dimensions also are subject to government regulations. The Company also may become subject to new or more restrictive regulations relating to fuel emissions, environmental protection, drivers’ hours-of-service, driver eligibility requirements, on-board reporting of operations, collective bargaining, ergonomics, and other matters affecting safety, insurance, and operating methods. Other agencies, such as the U.S. Environmental Protection Agency (EPA), and the U.S.

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Department of Homeland Security (DHS), the U.S. Department of Defense (DOD) and the U.S. Department of Energy (DOE) also regulate the Company’s equipment, operations, drivers, and the environment. The Company conducts operations outside of the United States, and is subject to analogous governmental safety, fitness, weight and equipment regulations and environmental protection and operating standards, as well as the Foreign Corrupt Practices Act (FCPA), which generally prohibits United States companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining favorable treatment. Any investigation of any actual or alleged violations of such laws could also harm the Company’s reputation or have a material adverse impact on its business, financial condition, results of operations, and cash flows.

The methodology used to determine a carrier’s safety rating could be changed by the Federal Motor Carrier Safety Administration (FMCSA) and, as a result, the Company’s acceptable safety rating could be impaired. In particular, the FMCSA continues to utilize the three safety fitness rating scale: “satisfactory,” “conditional,” and “unsatisfactory”—to assess the safety fitness of motor carriers and the Company currently has a “satisfactory” FMCSA rating on 100% of its fleet. While the Company believes the FMCSA will update its records and grant a “satisfactory” rating, there can be no guarantee that this rating will occur. Accordingly, the Company’s market opportunities could remain constrained, as many customers require a rating of “satisfactory”. However, pursuant to a 2015 federal statutory mandate, the FMCSA commissioned the National Academy of Sciences (NAS) to conduct a study and report upon the CSA program and its underlying Safety Measurement System (SMS), which is the FMCSA’s process for identifying patterns of non-compliance and issuing safety-fitness determinations for motor carriers. In June 2017, the NAS published a report on the subject providing specific recommendations and concluding, among other things, that the FMCSA should explore a more formal statistical model to replace the current SMS process. In June 2018, the FMCSA posted its response to the NAS study in a report to Congress, concluding, among other things, that it would develop and test a new model, the Item Response Theory (IRT), which would replace the SMS process currently used. The FMCSA was expected to commence small scale testing of the IRT model as early as September 2018, with full scale testing expected to occur in April 2019 and possible program roll-out expected to occur in late 2019 but the testing schedule has been delayed. The FMCSA’s June 2018 response is under audit by the DOT Inspector General to assess consistency with the NAS recommendations, and the audit findings will guide the agency’s actions and timing with respect to testing of the IRT model as a potential replacement for the SMS, in the event and to the extent that the FMCSA adopts the IRT model in replacement of the SMS or otherwise pursues rulemakings in the future that revise the methodology used to determine a carrier’s safety rating in a manner that incorporates more stringent standards, then it is possible that the Company and other motor carriers could be adversely affected, as compared to consideration of the current standards. If the Company were to receive an unsatisfactory CSA score, whether under the current SMS process, the IRT model, should it be finalized, and adopted, or as a result of some other safety-fitness determination, it could adversely affect the Company’s business as many of its existing customer contracts have a prohibition against doing business with carriers that have an “unsatisfactory” DOT safety rating, and an unsatisfactory rating could negatively impact or restrict the Company’s operations.

The FMCSA published a final rule in December 2015 mandating the use of Electronic Logging Devices (ELDs) for commercial motor vehicle drivers to measure their compliance with hours-of-service requirements by December 18, 2017. The 2015 ELD final rule generally applies to most motor carriers and drivers who are required to keep records of duty status, unless they qualify for an exception to the rule, and the rule also applies to drivers domiciled in Canada and Mexico. Under the 2015 final rule, motor carriers and drivers subject to the rule were required to use either an ELD or an automatic onboard recording device (AOBRD) compliant with existing regulations by December 18, 2017. However, the AOBRDs were only permitted to be used until December 16, 2019, provided those devices were put into use before December 18, 2017. Starting December 16, 2019, all carriers and drivers subject to the 2015 final rule must use ELDs. Commencing with the December 18, 2017 effective date, the Company and other motor carriers subject to the 2015 rule are required to use ELDs or AOBRDs in their operations.

The Company is subject to various environmental laws and regulations governing, among other matters, the operation of fuel storage tanks, release of emissions from its vehicles (including engine idling) and facilities, and adverse impacts to the environment, including to the soil, groundwater, and surface water. The Company has implemented programs designed to monitor and address identified environmental risks. Historically, the Company’s environmental compliance costs have not had a material adverse effect on its results of operations; however, there can be no assurance that such costs will not be material in the future or that such future compliance will not have a material adverse effect on the Company’s business and operating results.

The Company also has vehicle maintenance operations at certain of its facilities. The Company’s operations involve the risks of fuel spillage or seepage into the environment, discharge of contaminants, environmental and natural resource damage, and unauthorized hazardous material spills, releases, or disposal actions, among others. Some of the Company’s operations are at facilities where soil and groundwater contamination have occurred. If the Company is found to be responsible for such contamination or spills,

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the Company could be subject to costs and liabilities, including costs for remediation, environmental natural resource damages and penalties.

We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect such additional regulation, when and if it occurs, would have on our business in the future. Such additional regulation could require, however, any or all of the actions listed below, which could have a material adverse effect on our operations:

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Environmental compliance costs and liabilities could reduce our earnings and available cash for our operations.

We are subject to increasingly stringent laws and regulations relating to environmental protection and the importation and use of hazardous materials, including laws and regulations governing air emissions, water discharges and waste management. Government authorities have the power to enforce compliance with their regulations, and violations are subject to fines, injunctions or both. We incur and expect to continue to incur capital and operating costs to comply with environmental laws and regulations. The technical requirements of these laws and regulations are becoming increasingly complex and expensive to implement. These laws may provide for “strict liability” for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for damages without regard to negligence or fault on the part of the party. Some environmental laws provide for joint and serval strict liability for remediation of spills and release of hazardous substances.

Stricter enforcement of existing laws and regulations, new laws and regulations or the imposition of new or increased requirements could require us to incur costs and penalties or become the basis of new or increased liabilities that could reduce its revenue and available cash for operations. The Company believes it is currently in compliance with environmental laws and regulations.

Compliance with climate change legislation or initiatives could negatively impact our business.

The U.S. Congress has considered legislation to mandate reductions of greenhouse gas emissions and certain states have already implemented, or may be in the process of implementing, similar legislation. Additionally, the U.S. Supreme Court has held in its decisions that carbon dioxide can be regulated as an “air pollutant” under the Clean Air Act, which could result in future regulations even if the U.S. Congress does not adopt new legislation regarding emissions. At this time, it is not possible to predict how legislation or new federal or state government mandates regarding the emission of greenhouse gases could impact our business; however, any such future laws or regulations could require us or our customers to devote potentially material amounts of capital or other resources in order to comply with such regulations. These expenditures could have a material adverse impact on our financial condition, results of operations, or cash flows.

Changes in accounting pronouncements could have an adverse effect on our results of operations, as reported in our financial statements.

Our consolidated financial statements are prepared in accordance with GAAP, which is periodically revised and/or expanded. Accordingly, from time to time we are required to adopt new or revised accounting guidance and related interpretations issued by recognized authoritative bodies, including the Financial Accounting Standards Board and the SEC. Market conditions have prompted these organizations to issue new guidance that further interprets or seeks to revise accounting pronouncements related to various transactions as well as to issue new guidance expanding disclosures. An assessment of proposed standards is not provided, as such proposals are subject to change through the exposure process and, therefore, their effects on our financial statements cannot be meaningfully assessed. It is possible that future accounting guidance we are required to adopt could change the current accounting

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treatment that we apply to our consolidated financial statements and that such changes could have an adverse effect on our results of operations, as reported in our consolidated financial statements.

Unexpected events, including natural disasters, may increase our cost of doing business or disrupt our operations.

The occurrence of one or more unexpected events, including fires, tornadoes, tsunamis, hurricanes, cold freezes, earthquakes, floods and other forms of severe weather in the United States or in other countries in which our suppliers may be located could adversely affect our operations and financial performance. Natural disasters, pandemic illness, equipment failures, power outages or other unexpected events could result in physical damage to and complete or partial closure of one or more of our offices and disrupt our ability to deliver our products and services. Existing insurance arrangements may not provide protection for all of the costs that may arise from such events.

Failure to obtain and retain skilled technical personnel could impede our operations.

We require skilled personnel to operate and provide technical services and support for our business. Competition for the personnel required for our businesses intensifies as activity increases. In periods of high utilization, it may become more difficult to find and retain qualified individuals. This could increase our costs or have other adverse effects on our operations.

Our operations are subject to inherent risks, some of which are beyond our control. These risks may not be fully covered under our insurance policies.

Our operations are subject to hazards inherent in the transportation services and the oil and natural gas industry, such as, but not limited to, accidents, blowouts, explosions, fires, and oil spills. These conditions can cause:

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The Company maintains insurance coverage that we believe to be customary in the industry against these hazards. However, we do not have insurance against all foreseeable risks, either because insurance is not available or because of the high premium costs. The occurrence of an event not fully insured against, or the failure of an insurer to meet its insurance obligations, could result in substantial losses. In addition, we may not be able to maintain adequate insurance in the future at reasonable rates. Insurance may not be available to cover any or all of the risks to which we are subject, or, even if available, it may be inadequate, or insurance premiums or other costs could rise significantly in the future so as to make such insurance prohibitively expensive. It is likely that, in our insurance renewals, our premiums and deductibles will be higher, and certain insurance coverage either will be unavailable or considerably more expensive than it has been in the recent past. In addition, our insurance is subject to coverage limits. The occurrence of a significant event or adverse claim in excess of the insurance coverage that we maintain or that is not covered by insurance could have a material adverse effect on our financial condition and results of operations.

Indemnification of officers and directors may result in unanticipated expenses.

The Delaware General Corporation Law, our Amended and Restated Certificate of Incorporation and bylaws, and indemnification agreements between the Company and certain individuals provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with us or activities on our behalf. We also will bear the expenses of such litigation for any of our directors, officers, employees, or agents, upon such person’s promise to repay them if it is ultimately determined that any such person shall not have been entitled to indemnification. This indemnification policy could result in substantial expenditures by us that we may be unable to recoup and could direct funds away from our business and products (if any).

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Our operations are subject to cyber-attacks that could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.

Our operations are increasingly dependent on digital technologies and services. We use these technologies for internal purposes, including data storage, processing and transmissions, as well as in our interactions with customers and suppliers. Digital technologies are subject to the risk of cyber-attacks. If our systems for protecting against cybersecurity risks prove not to be sufficient, we could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary or confidential information, or customer, supplier, or employee data; interruption of our business operations; and increased costs required to prevent, respond to, or mitigate cybersecurity attacks. These risks could harm our reputation and our relationships with customers, suppliers, employees and other third parties, and may result in claims against us. These risks could have a material adverse effect on our business, consolidated results of operations and consolidated financial condition.

Risks Related to Our Securities

There is a limited trading market for our shares. You may not be able to sell your shares if you need money.

Our common stock is traded on the OTCQB Venture Market (herein “OTC Market”), an inter-dealer automated quotation system for equity securities. According to OTC Markets, during the thirty days preceding filing of this report, the average daily trading volume of our common stock was approximately 19,000 shares traded per day, on average, and currently is thinly traded. As of March 31, 2023, we had 894 record holders of our common stock (not including an indeterminate number of stockholders whose shares are held by brokers in “street name”). There has been limited trading activity in our stock, and when it has traded, the price has fluctuated widely. We consider our common stock to be “thinly traded” and any last reported sale prices may not be a true market-based valuation of the common stock. Stockholders may experience difficulty selling their shares if they choose to do so because of the illiquid market and limited public float for our common stock.

We are subject to the penny stock rules and these rules may adversely affect trading in our common stock.

Our common stock is a “low-priced” security under rules promulgated under the Securities Exchange Act of 1934. In accordance with these rules, broker-dealers participating in transactions in low-priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer’s duties in selling the stock, the customer’s rights and remedies and certain market and other information. Furthermore, the broker-dealer must make a suitability determination approving the customer for low-priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent from the customer, and provide monthly account statements to the customer. The effect of these restrictions probably decreases the willingness of broker-dealers to make a market in our common stock, decreases liquidity of our common stock and increases transaction costs for sales and purchases of our common stock as compared to other securities.

Transfers of our securities may be restricted by virtue of state securities “blue sky” laws which prohibit trading absent compliance with individual state laws. These restrictions may make it difficult or impossible to sell shares in those states.

Transfers of our common stock may be restricted under the securities or securities regulations laws promulgated by various states and foreign jurisdictions, commonly referred to as “blue sky” laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions. Because the securities registered hereunder have not been registered for resale under the blue sky laws of any state, the holders of such shares and persons who desire to purchase them should be aware that there may be significant state blue sky law restrictions upon the ability of investors to sell the securities and of purchasers to purchase the securities. These restrictions may prohibit the secondary trading of our common stock. Investors should consider the secondary market for our securities to be a limited one.

Our Officers, Directors and ten percent or greater shareholders collectively own a substantial portion of our outstanding common stock and fixed exercise price convertible notes, and as long as they do, they may be able to control the outcome of stockholder voting.

Our Officers, Directors and ten percent or greater shareholders are collectively the beneficial owners of approximately 76.6% of the outstanding shares of our common stock as of the date of this report, assuming the conversion of all of the convertible securities held by our Officers, Directors and ten percent or greater shareholders. As long as our Officers, Directors and ten percent or greater shareholders collectively own a significant percentage of our common stock, our other shareholders may generally be unable to affect

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or change the management or the direction of our company without the support of our Officers, Directors and ten percent or greater shareholders. As a result, some investors may be unwilling to purchase our common stock. If the demand for our common stock is reduced because our Officers, Directors and ten percent or greater shareholders have significant influence over our company, the price of our common stock could be materially depressed. Upon the conversion of all of our outstanding convertible notes, an additional 79,467,400 shares of our common stock would be issued and outstanding resulting in substantial dilution of our current shareholders voting power and ownership interests. The Officers, Directors and ten percent or greater shareholders will be able to exert significant influence over the outcome of all corporate actions requiring stockholder approval, including the election of Directors, amendments to our certificate of incorporation and approval of significant corporate transactions.

We have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval, which could cause your investment to be diluted.

Our Certificate of Incorporation authorizes the Board of Directors to issue up to 250,000,000 shares of common stock and up to 1,000,000 shares of preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly, any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect of diluting your investment.

By issuing preferred stock, we may be able to delay, defer or prevent a change of control.

Our Certificate of Incorporation permits us to issue, without approval from our shareholders, a total of 1,000,000 shares of preferred stock, none of which are currently outstanding. Our Board of Directors can determine the rights, preferences, privileges and restrictions granted to, or imposed upon, the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series. It is possible that our Board of Directors, in determining the rights, preferences and privileges to be granted when the preferred stock is issued, may include provisions that have the effect of delaying, deferring or preventing a change in control, discouraging bids for our common stock at a premium over the market price, or that adversely affect the market price of and the voting and other rights of the holders of our common stock.

Our stock price is volatile.

The trading price of our common stock has been and continues to be subject to fluctuations. The stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, the operating and stock performance of other companies that investors may deem as comparable and news reports relating to trends in the marketplace, among other factors. Significant volatility in the market price of our common stock may arise due to factors such as:

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As long as there is only a limited public market for our common stock, the sale of a significant number of shares of our common stock at any particular time could be difficult to achieve at the market prices prevailing immediately before such shares are offered and could cause a severe decline in the price of our common stock.

There are limitations in connection with the availability of quotes and order information on the OTC Markets.

Trades and quotations on the OTC Markets involve a manual process and the market information for such securities cannot be guaranteed. In addition, quote information, or even firm quotes, may not be available. The manual execution process may delay order processing and intervening price fluctuations may result in the failure of a limit order to execute or the execution of a market order at a significantly different price. Execution of trades, execution reporting and the delivery of legal trade confirmation may be delayed significantly. Consequently, one may not be able to sell shares of our common stock at the optimum trading prices.

There are delays in order communication on the OTC Markets.

Electronic processing of orders is not available for securities traded on the OTC Marketplace and high order volume and communication risks may prevent or delay the execution of one’s OTC Marketplace trading orders. This lack of automated order processing may affect the timeliness of order execution reporting and the availability of firm quotes for shares of our common stock. Heavy market volume may lead to a delay in the processing of OTC Marketplace security orders for shares of our common stock, due to the manual nature of the market. Consequently, one may not able to sell shares of our common stock at the optimum trading prices.

There is a risk of market fraud on the OTC Marketplace.

OTC Marketplace securities are frequent targets of fraud or market manipulation. Not only because of their generally low price, but also because the OTC Market reporting requirements for these securities are less stringent than for listed or NASDAQ traded securities, and no exchange requirements are imposed. Dealers may dominate the market and set prices that are not based on competitive forces. Individuals or groups may create fraudulent markets and control the sudden, sharp increase of price and trading volume and the equally sudden collapse of the market price for shares of our common stock.

There is a limitation in connection with the editing and canceling of orders on the OTC Markets.

Orders for OTC Market securities may be canceled or edited like orders for other securities. All requests to change or cancel an order must be submitted to, received, and processed by the OTC Markets. Due to the manual order processing involved in handling OTC Markets trades, order processing and reporting may be delayed, and one may not be able to cancel or edit one’s order. Consequently, one may not be able to sell its shares of our common stock at the optimum trading prices.

Increased dealer compensation could adversely affect our stock price.

The dealer’s spread (the difference between the bid and ask prices) may be large and may result in substantial losses to the seller of shares of our common stock on the OTC Markets if the stock must be sold immediately. Further, purchasers of shares of our common stock may incur an immediate “paper” loss due to the price spread. Moreover, dealers trading on the OTC Markets may not have a bid price for shares of our common stock on the OTC Markets. Due to the foregoing, demand for shares of our common stock on the OTC Markets may be decreased or eliminated.

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Our principal executive office is located at 20475 State Hwy 249, Suite 450, Houston, Texas 77070, where we lease approximately 4,319 square feet of office space pursuant to a thirty-nine-month term that commenced on December 1, 2021, at a rate of approximately $6,000 per month. We also have facilities throughout Texas. Our 5J Oilfield Services and 5J Trucking subsidiaries both have entered into leases for our Palestine, Texas location. The term of the lease is for five years, expiring on February 1, 2025. The aggregate lease amount is for $6,750 per month, with an option to extend the lease for an additional five years. We lease a ten-acre facility located in Floresville, Texas. The Floresville lease is for a term of three-years expiring on April 30, 2023 at a cost of $3,500

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per month. We lease a nineteen-acre facility in West Odessa, Texas. The West Odessa lease is for a term of five years expiring on February 1, 2025 at a cost of $4,000 per month. The Palestine, Floresville and West Odessa leases are all leased from 5J Properties LLC, controlled by Mr. Frye the previous owner of 5J, a member of our board of directors, and an affiliate of our Company. Additionally, 5J has leased an office in Fort Mill, South Carolina comprised of approximately 1,969 square feet of office space, for approximately $4,256 per month, expiring on October 31, 2023. The Company currently utilizes a location in East Houston, Texas that it previously leased until April 1, 2022. The Company entered into a transition services agreement to use the site in exchange for operating the remaining area on behalf of the lessor, for no consideration. This agreement is on a month to month basis and is cancelable by either party with 30 days notice.

Currently, we believe that our facilities are adequate for our present and future needs.

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From time to time, we may be subject to routine litigation, claims, or disputes in the ordinary course of business. Other than the above listed matter, in the opinion of management; no other pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on SMG’s financial position, results of operations or cash flows. We cannot predict with certainty, however, the outcome or effect of any of the litigation or investigatory matters specifically described above or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any lawsuits or investigations.

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Not applicable.

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PART II

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Market Price and Dividend Information

Our common stock is quoted on the OTCQB Marketplace operated by OTC Market Group, Inc. under the symbol “SMGI”. The following table sets forth the high and low closing prices for our common stock as reported.

Quarterly Price Ranges

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As of March 31, 2023, the closing sales price of our common stock on the OTCQB was $0.19. As of March 31, 2023, there were approximately 894 stockholders of record of our common stock.

Dividend Policy

Any determination to pay dividends will be at the discretion of our Board and will depend on our financial condition, results of operations, capital requirements and other factors that our Board deems relevant. In addition, the terms of any current or future debt or credit facility may preclude us from paying dividends. At this time, we do not anticipate paying any future dividends.

Issuer Purchases of Equity Securities

None.

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We are a smaller reporting company, and therefore, we are not required to provide information required by this item.

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The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forwarding looking statements as a result of certain factors, including but not limited to, those which are not within our control.

Overview

We are a growth-oriented transportation services company focused on the domestic logistics market. Our primary business objective is to grow our operations and create value for our stockholders through organic growth and strategic acquisitions. We have implemented a Buy and Build growth strategy of acquiring middle market transportation companies and generating organic growth post-acquisition when possible by removing business constraints and strategic cross-selling of services benefiting us with higher equipment utilization and market share. We believe our business focus and equipment fleet position us to be significant participant in the domestic United States infrastructure market.

Our wholly-owned operating subsidiaries are:

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Together these business units are referred to as the “5J Transportation Group”.

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Our operating subsidiaries provide a range of transportation services such as:

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In connection with our focus to expand our transportation services business and exit certain up-stream oil and gas (O&G) industrial-related businesses, the financial results of the following business have been classified as discontinued operations on our consolidated financial statements for the following businesses:

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We are headquartered in Houston, Texas with facilities in Floresville, Hempstead, Henderson, Houston, Odessa, Palestine, Victoria, Texas and Fort Mill, South Carolina. Our web site is www.5J-Group.com and www.SMGIndustries.com.

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Acquisition, divestiture and wind-down of businesses

On February 27, 2020, we acquired one hundred percent of the membership interests of each of 5J Oilfield Services LLC (“5J Oilfield”) and 5J Trucking LLC (“5J Trucking”), combined referred to as “5J”. The aggregate purchase price of 5J was $12.7 million, consisting of a combination of cash, notes and Series B Convertible Preferred Stock.

In December 2020 we sold MG Cleaners LLC (“MG”), an O&G drilling rig cleaning company. The results of operations of MG are reflected in the Consolidated Statements of Operations for the year ended December 31, 2020 as “net loss from discontinued operations”.

In December 2020, the Company decided to cease the operations of Trinity Services LLC (“Trinity”), an O&G drilling pad dirt construction company. The assets and operations of Trinity are reflected on the December 31, 2022 and 2021 Consolidated Balance Sheets as “assets or liabilities of discontinued operations” and the results of operations are reflected in the Consolidated Statements of Operations for the years ended December 31, 2022 and 2021 as “net loss from discontinued operations”.

In the second quarter of 2021 we formed 5J Transportation LLC in connection with leasing the East Houston terminal operations for our flatbed services. In the first quarter of 2021, we formed 5J Brokerage LLC, which was renamed 5J Logistics Services LLC during the fourth quarter of 2021, our transportation brokerage business, in connection with offering those services.

All of our 5J subsidiaries are referred to as the 5J Transportation Group.

Results of Operations

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

The Consolidated Balance Sheets as of December 31, 2022 and 2021 present the assets and liabilities of MG and Trinity as discontinued operations. The Consolidated Statements of Operations for the years end December 31, 2022 and 2021 present the results of MG and Trinity as Net loss from discontinued operations. The Consolidated Statements of Cash Flows for the years end December 31, 2022 and 2021 present operating, investing and financing activities of MG and Trinity as cash flows from or used in discontinued operations.

Sales for the year ended December 31, 2022 increased to $71,021,862, an increase of 36% from $52,113,827 for the year ended December 31, 2021. The increase in sales in the year end 2022 was primarily driven by increased revenues in our industrial transportation segment from higher customer activity transporting drilling rigs, and in our heavy haul business transporting bridge beams, over-dimensional infrastructure items and large natural gas compressors. Our increase in revenues was also attributable to the new contribution of revenues from our 5J Logistics brokerage division, not present in the previous year period along with the general improvement in the domestic United States economy from COVID-19 pandemic.

During the year ended December 31, 2022, cost of sales increased to $65,285,261, or approximately 92% of sales, compared to $52,714,418, or about 101.2% of sales for the 2021 period. The decrease in cost of sales as a percentage of revenues is the result of higher revenues covering more fixed costs in cost of sales compared to the previous year. The increase in cost of sales as a total amount is due primarily to higher direct labor costs, higher freight expense, higher fuel costs, and higher depreciation expenses, a non-cash expense, allocated in cost of sales compared to the previous year period 2021. Our Cost of Sales includes non-cash depreciation expense of $5,328,366 for the year ended December 31, 2022, and $5,398,529 for the comparable period in 2021.

Selling, general and administrative (SG&A) expenses for the year ended December 31, 2022 increased to $9,079,344, or approximately 13% of revenues, compared to $8,377,682, or 16.1% of revenues for the year ended December 31, 2021. The increase in total amount was due primarily to higher wage expense, professional fees and higher consulting costs from accounting and other consultants. The non-cash share based compensation expense included in SG&A expenses was $61,043 for the year ended December 31, 2022 compared to $67,460 for the same period in 2021. Bad debt expense included in SG&A expenses for the year ended December 31, 2022 was $208,996, as compared to bad debt expense of $454,990 in 2021 resulting from uncollectable accounts receivables from certain customers.

Gain on disposal of assets for the years ended December 31, 2022 and 2021 was $330,499 and $43,624 and was primarily related to the disposal of 5J assets.

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Interest expense, net, increased to $9,431,153 during the year ended December 31, 2022 from $7,618,889 during the year ended December 31, 2021, resulting from increased convertible note issuances and associated debt discount amortization. Gain on the US SBA’s PPP loan forgiveness program for the years ended December 31, 2022 and 2021 was $0 and $5,023,089, respectively. The Company recognized other income of $228,689 related to certain insurance reimbursements received during the year ended December 31, 2022.

The net loss from continuing operations for the year ended December 31, 2022 was $11,750,787 as compared to a net loss of $11,484,636 for the year ended December 31, 2021. Our decrease in net loss in 2022 was primarily attributable to the increased gross profit due to the Company’s expansion of its service offerings, partially offset by the increases in interest expense and selling, general and administrative costs.

We plan to address our net loss and future operating results with a goal to achieve positive cash flow from operations by increasing sales organically or through acquisitions, covering more fixed costs within cost of sales, improving gross margins with raising prices for our services as the market bears, a better sales mix adding more higher margin service revenues such as super heavy haul, and reducing general and administrative costs including professional fees.

Liquidity and Capital Resources

Cash Flows

Operating activities

Net cash used in operating activities was $725,405 for the year ended December 31, 2022, compared to $8,176,146 for the year ended December 31, 2021, including $80,450 and $568,519 of cash provided by discontinued operations during the years ended December 31, 2022 and 2021, respectively.

For the year ended December 31, 2022, net cash used in continuing operating activities of $805,855 consisted of net loss of $11,750,787, which included non-cash costs of depreciation and amortization of $5,238,366, gain on extinguishment of debt of $564,814, gain on disposal of assets of $330,499, amortization of deferred financing costs of $3,790,028, shares issued for debt extension $643,467 and bad debt expense of $208,996. Changes in working capital accounts included changes in accounts receivable of $691,441, other assets of $165,520, right of use operating lease liabilities of $172,736, accrued expenses and other labilities of $980,656, and accounts payable of $1,005,206, partially offset by changes in prepaid expenses and other current assets of $3,767,578, accounts payable – related party of $471,001 and deferred revenue of $128,000.

For the year ended December 31, 2021, net cash used in continuing operating activities of $8,744,665 consisted of net loss of $11,484,636, which included non-cash costs of depreciation and amortization of $5,398,529, gain on PPP forgiveness loan of $5,022,102, gain on sale of assets of $43,624, amortization of deferred financing costs of $2,208,291, loss on settlement of liabilities of $41,397 and bad debt expense of $454,990. Changes in working capital accounts included changes in accounts receivable of $7,237,370, other assets of $241,940 and right of use operating lease liabilities of $537,616, partially offset by changes in accounts payable of $2,677,329, prepaid expenses and other current assets of $3,118,119 and accrued expenses and other labilities of $1,525,563.

Investing activities

Net cash provided by investing activities was $594,152 for the year ended December 31, 2022, compared to net cash used investing activities $132,026 for the year ended December 31, 2021.

For the year ended December 31, 2022, net cash used in investing activities consisted of proceeds from disposal of property and equipment of 895,564 and cash paid for property and equipment of 301,412. For the year ended December 31, 2021, net cash used in investing activities consisted of cash paid for property and equipment of $97,026 and cash paid for disposal of MG Cleaners, LLC of $35,000.

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Financing activities

Net cash provided by financing activities was $248,120 for the year ended December 31, 2022, compared to $8,445,260 for the year ended December 31, 2021, including $80,450 and $226,932 of cash used in financing from to discontinued operations during the years ended December 31, 2022 and 2021, respectively.

For the year ended December 31, 2022, net cash provided by financing activities consisted of net proceeds from secured line of credit of $1,126,700, net proceeds from notes payable of $5,229,098, partially offset by payments on notes payable of $6,027,228.

For the year ended December 31, 2021, net cash provided by financing activities consisted of net proceeds from secured line of credit of $5,326,060, net proceeds from notes payable of $15,064,003 and proceeds from convertible notes payable of $3,906,079, partially offset by payments on notes payable of $15,553,327, payment on convertible notes payable of $50,000 and payment of deferred finance costs of $20,623.

Our cash flows from operations are primarily funded through our financing activities, including our accounts receivable line of credit facility, notes and loans, stock sales, issuing our stock for services and various leases. Currently, we believe we will need to continue to utilize lines of credit, borrowings and stock sales to sufficiently sustain our current level of operations for the next 12 months. At present, we believe the industry and general domestic economic activity is still partially depressed given the current economic environment and current commodity prices. We likely will require additional capital to maintain or expand operations. Additionally, we believe any material acquisition of another operating company would require additional outside capital consisting of debt or equity. Failure to secure additional funds could significantly hamper our ongoing operations particularly if a down cycle in our industry continues further. As the business cycle improves, and the pandemic dissipates in the markets we serve, we plan to improve our cash flows provided in operating activities by focusing on increasing sales by increasing utilization of the assets we have acquired and offering higher value services that receive higher gross margins. However, there can be no assurances given of industry improvement, pandemic relief or improved cash flows of our business.

Historically, we have funded our capital expenditures internally through cash flow, leasing and financing arrangements. We intend to continue to fund future capital expenditures through cash flow, as well as through capital available to us pursuant to our line of credit, capital from the sale of our debt and equity securities and through commercial leasing and financing programs.

On January 27, 2022, the Company issued a secured promissory note for $843,844, which includes precomputed interest of $147,818. The note is due on May 1, 2026 and secured by machinery and equipment owned by the Company. The Company paid an initial installment of $95,025 plus an additional $10,634 payment, with monthly payments of approximately $15,275 per month beginning in June 2022 through maturity.

On January 6, 2022, Newton Dorsett, a member of our board of directors, loaned us $100,000 pursuant to a short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On January 6, 2022, Grey Fox Investments which is controlled by Brady Crosswell, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the loan to us in December 2021 of $150,000, totals $250,000. This note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 142,538 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

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On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 375,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 14, 2022, James Frye, a member of our board of directors, loaned us $134,073 pursuant to a short term note that matured on March 31, 2022. Mr. Frye also received 201,110 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On March 3, 2022, Mr. Madden loaned us $450,000 pursuant to a short-term bridge note that matured on March 31, 2022. Mr. Madden also received 675,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On September 7, 2021, 5J Trucking, 5J Oilfield, 5J Transportation, 5J Logistics Services and 5J Specialized LLC entered into a loan agreement (“Loan Agreement”) and security agreement (“Security Agreement”) with Amerisource Funding Inc. (“Amerisource”) in the total amount of $12,740,000. Pursuant to the terms of the Loan Agreement, the 5J Transportation Group, other than 5J Driveaway which was formed subsequent to the date of the loan, will pay interest only on a monthly basis through October 1, 2022 and principal and interest thereafter over the remaining term through September 7, 2026. The Note bears interest at a rate of 12.0% per annum and may be prepaid early at any time without penalty. The 5J Transportation Group will also pay an annual collateral management fee to Amerisource in the amount of 0.40% of the total loan amount payable at the closing and each anniversary during the term of the note. Amerisource is a related party of the Company due to its holdings of common stock and convertible debt of the Company and has an officer on the Board of Directors of the Company. On March 15, 2022, each of our 5J subsidiaries entered into an agreement with Amerisource Funding Inc. (“Amerisource”), our senior lender, to amend the Loan Agreement dated September 7, 2021, pursuant to which Amerisource agreed to increase the loan commitment to the 5J entities from $12,740,000 to $16,740,000. The Company received $4,000,000 of cash proceeds from this agreement during the year ended December 31, 2022.

Pursuant to the terms of the Security Agreement, the 5J Transportation Group, other than 5J Driveaway which was formed subsequent to the date of the loan, granted a security interest in all of their assets to Amerisource as collateral for the repayment of the Amerisource loan.

In connection with the Loan Agreement, the Company, the parent company of each of the 5J Transportation Group, entered into a pledge agreement pursuant to which the Company has granted a security interest in all of its assets to Amerisource and a guaranty agreement pursuant to which the Company has guaranteed the timely payment of all amounts due under the Loan Agreement. The Loan Agreement includes customary covenants, including a negative convent that the 5J Transportation Group may not create or permit for any lien to exist on the collateral nor enter into any new debt agreement.

The proceeds from the issuance of the Note were used to pay down the outstanding balance owed to Utica Leaseco LLC (“Utica”) pursuant to a Second Forbearance Agreement entered into by and between 5J Trucking and 5J Oilfield with Utica on September 7, 2021 (“Forbearance Agreement”). The Utica agreement was paid in full through the Amerisource Loan Agreement in November 2021.

On February 27, 2020, the 5J Oilfield and 5J Trucking entered into a Revolving Accounts Receivable Assignment and Term Loan Financing and Security Agreement with Amerisource Funding Inc. (“Amerisource”) in the aggregate amount of $10,000,000 (“Amerisource Financing”). The Company used a portion of the proceeds from the Amerisource Financing to pay the cash portion of the purchase price of the 5J Oilfield and 5J Trucking.

The Amerisource Financing provides for: (i) an equipment loan in the principal amount of $1,401,559 (“Amerisource Equipment Loan”), (ii) a bridge term facility in the amount of $550,690 (“Bridge Facility”), and (iii) an accounts receivable revolving line of credit up to $10,000,000 (“AR Facility”).  The Bridge Facility was paid off during 2020 by the Company.

The AR Facility has been issued in an amount not to exceed $10,000,000, with the maximum availability limited to 90% of the eligible accounts receivable (as defined in the financing agreement). The AR Facility is paid for by the assignment of the accounts receivable of each of the 5J Transportation Group and is secured by all instruments and proceeds related thereto. The AR Facility has an interest rate of 4.5% in excess of the prime rate per annum, an initial collateral management fee of 0.75% of the maximum account limit per annum, a non-usage fee of 0.35% assessed on a quarterly basis on the difference between the maximum availability under the

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AR Facility and the average daily revolving loan balance outstanding, and a one time commitment fee equal to $100,000 paid at closing. The AR Facility can be terminated by the 5J Transportation Group with 60 days written notice. There is an early termination fee equal to two percent (2.0)% of the then maximum account limit if there are more than twelve (12) months remaining in term of the AR Facility, or one percent (1.0)% of the then maximum account limit if there twelve months or less remaining in the term of the AR Facility. The Company is a guarantor of the Amerisource Financing. The AR Facility originally matured on February 27, 2023, but automatically extended for an additional 12 months per the terms of the agreement.

The Amerisource Equipment Loan in the amount of $1,401,559 is secured by certain equipment pledged as collateral, has a term of thirty-six (36) months during which the 5J Transportation Group shall make equal monthly payments of principal and interest, bears an interest rate of prime rate plus five and one-quarter percent (5.25)% and an origination fee equal to one and one-half percent (1.5)% of the loan amount.

On February 27, 2020, the Company entered into a loan agreement with Amerisource Leasing Corporation for the sale of a 10% convertible promissory note in the principal amount of $1,600,000 (“Amerisource Note”) to Amerisource (“Amerisource Loan Agreement”). The Amerisource Note matured on March 31, 2023 and was extended to June 30, 2023 and is convertible into shares of the Company’s common stock at a conversion price of $0.25 per share. The interest rate on the Amerisource Note increases to 11% per annum on February 27, 2021 and to 12% per annum on February 27, 2022. Interest shall be paid on a quarterly basis. In addition, 2,498,736 shares of the Company’s common stock were issued to the noteholder in connection with the sale of the Amerisource Note. The Amerisource Note may be prepaid at any time by the Company on 10 days-notice to the noteholder without penalty.

During the year ended December 31, 2022, the Company did not issue any convertible promissory notes. During the year ended December 31, 2021, we sold an aggregate of $5,287,740 principal amount of convertible promissory notes and issued 7,931,612 shares of restricted common stock in connection therewith.

Off-balance Sheet Arrangements

As of December 31, 2022, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements, including the notes thereto. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements. Management relies on historical experience and other assumptions believed to be reasonable in making its judgment and estimates. Actual results could differ materially from those estimates.

Management believes its application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change.

Management believes the following are its most critical accounting policies:

Intangible Assets, and Long-Lived Assets

The fair value of the Company’s reporting unit is dependent upon the Company’s estimate of future cash flows and other factors. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate derived from the Company’s market capitalization plus a suitable control premium at date of the evaluation.

The financial and credit market volatility directly impacts the Company’s fair value measurement through the Company’s weighted average cost of capital that the Company uses to determine its discount rate and through the Company’s stock price that the Company uses to determine its market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded.

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The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value.

The Company’s long-lived assets, including intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the asset by comparing the undiscounted future net cash flows expected to result from the asset to its carrying value. If the carrying value exceeds the undiscounted future net cash flows of the asset, an impairment loss is measured and recognized. An impairment loss is measured as the difference between the net book value and the fair value of the long-lived asset. During the years ended December 31, 2022 and 2021, the Company evaluated long lived assets for impairment and recorded no impairment losses.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue From Contracts With Customers. Revenues are recognized when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for transferring those goods or services. Revenue is recognized based on the following five step model:

Service revenues are recognized when (or as) the Company satisfies a performance obligation by transferring control of the performance obligation to a customer. Control of a performance obligation may transfer to the customer either over time or at a point in time depending on an evaluation of the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the customer, as well as the nature of the services to be provided. Control transfers over time when the customer is able to direct the use of and obtain substantially all of the benefits of our work as we perform. This typically occurs when services have no alternative use and the Company has a right to payment for performance completed to date, including a reasonable profit margin. The majority of our revenues are recognized at a point in time.

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We are a smaller reporting company, and therefore, we are not required to provide information required by this item.

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Our financial statements and notes thereto are set forth in this Annual Report on Form 10-K on pages F-1 through F-35.

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None

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Evaluation of Disclosure Controls and Procedures: Our management carried out an evaluation of the effectiveness and design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the Exchange Act). Based on that evaluation, our Acting Chief Executive Officer and Chief Financial Officer has concluded that, at December 31, 2022, such disclosure controls and procedures were not effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time

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periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management including our Acting Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Limitations on the Effectiveness of Controls: Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitation in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Our Acting Chief Executive Officer and Chief Financial Officer has concluded, based on his evaluation as of the end of the period covered by this Report that our disclosure controls and procedures were sufficiently effective to provide reasonable assurance that the objectives of our disclosure control system were met.

Changes in Internal Control over Financial Reporting: There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and is a process designed by, or under the supervision of, our Acting Chief Executive Officer and Chief Financial Officer and effected by our Board, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

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Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - integrated Framework (2013).

Based on its evaluation, our management has concluded that, as of December 31, 2022, our internal control over financial reporting was not effective. The lack of separation of duties between the Acting Chief Executive Officer and the Chief Financial Officer, being the same person and the lack of a formal review process including multiple levels of review provided two material weaknesses in the effectiveness of our controls.

We are a smaller reporting company and are exempt from the requirement for an attestation report on the Company’s internal controls over financial reporting by our registered public accounting firm.

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None.

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None.

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PART III

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The following table sets forth the names of our Executive Officers and Directors as of the date of this Annual Report. Directors hold office for a period of one year from their election at the annual meeting of stockholders or until their successors are duly elected and qualified. Officers are elected by, and serve at the discretion of, the Board of Directors.

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Mr. Madden has served as our Chief Transition Officer since August 2021 and as a member of our board of directors since November 2021. Mr. Madden has assembled and grown a portfolio of companies over the past 30 years and serve as Chairman and CEO of Apex Heritage Group. Mr. Madden and his management teams have globally built, acquired, merged, and sold businesses, real estate and investments in and around the industrial, automotive, aerospace and energy industries. His experience and expertise include manufacturing, engineering, distribution, service companies and top-grading management teams. Mr. Madden has also served on a variety of non-profit boards in the role of Chairman, President, Long Range Planning Chair and Educational Chair for organizations including international commerce and industry associations, recreational clubs, youth sports associations, continuing educational groups, churches, and Vanderbilt University. Mr. Madden graduated from Vanderbilt University with a B.S. in 1991 and also attended the University of Innsbruck, Austria.

Mr. Flemming has served as our Interim Chief Executive Officer and Interim Chief Financial Officer since April 14, 2022 and as our Chief Business Development Officer since December 2020. Mr. Flemming previously served as our Chief Executive Officer from September 2017 through December 2020 and continues to serve as the Chairman of the Board of Directors. Prior thereto, Mr. Flemming was the Chief Executive Officer of MG Cleaners from June 2017 until September 2017. Previous to that, Mr. Flemming was a consultant for a financial consulting and advisory firm and a financial advisor to private companies during 2016 and early 2017. From June 2011 to March 2016, Mr. Flemming was the Chief Executive Officer, Treasurer, Secretary, and Chairman of the Board of HII Technologies Inc. HII Technologies was a Houston, Texas based oilfield services company with operations in Texas, Oklahoma, Ohio and West Virginia focused on commercializing technologies and providing services in frac water management, safety services and portable power used by exploration and production companies in the United States. During his tenure at HII, the Company acquired three frac water management companies and started up two other operating subsidiaries driving monthly revenues from nil in August 2012 building to $4.2 million per month by December 2014. In 2015, HII experienced an industry down-turn and ultimately entered into a plan of reorganization under Chapter 11 subsequent to Mr. Flemming’s employment.

Prior thereto, from 2009 to 2011, Mr. Flemming was Chief Financial Officer of Hemiwedge Industries Inc. a proprietary valve technology company with oilfield applications that was sold in 2011. From 2005 to 2009, Mr. Flemming was Chief Financial Officer of Shumate Industries, Inc., an oilfield manufacturing company and successor of Excalibur. Previous to that, from 2001 to 2005, Mr. Flemming was Chief Financial Officer of Excalibur Industries, Inc. an industrial and energy related manufacturer and fabrication company. From June 1999 to March 2001, he served as Chief Executive Officer of WorldByNet, Inc. a Houston, Texas based privately held technology company. From January 1994 to May 1999, Mr. Flemming served as Chief Executive Officer of FARO Pharmaceuticals, Inc., a privately held national specialty products company that he founded. Mr. Flemming received a Bachelor of Arts in Finance from the University of Houston.

Mr. Page was appointed to serve as a member of our board of directors on August 13, 2020. Since 2016, Mr. Page has been the Chief Administrative Officer, EVP & General Counsel of Amerisource Capital, a US-based financial lending and equity capital company. Since 2014, Mr. Page has been Of Counsel to the law firm of Selman, Munson & Lerner. Mr. Page previously served as CEO and serves as a Director of Venntis Technologies, a technology company focused on lighting and touch integration solutions for the horticultural, appliance and auto industries, since 2014. Mr. Page also served as CAO, interim CEO and a Director of Synagro

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Technologies, a private equity backed waste-to-energy company from 2009-2014. Mr. Page also sits on the non-profit boards of HiSPrint Ministries, Tres Dias and Ft. Bend Texans Sports associations. Mr. Page graduated from The University of Texas with a BS in Molecular Biology. Mr. Page received his Doctorate of Jurisprudence in 1994 from South Texas College of Law.

Mr. Crosswell was appointed to serve as a member of the Company’s board of directors on October 20, 2020. Mr. Crosswell currently serves as the General Partner of Grey Fox Investments, LP, which has investments in privately held companies in which he is active. He was Founder and Manager of Grey Rock Resources LLC and Grey Rock Gathering and Marketing LLC, which owned and managed rail, truck and marine terminal facilities in Lake Charles, LA. The companies internally processed and marketed crude oil and related products through these facilities. Both companies were sold in January 2020. Prior thereto, Mr. Crosswell was Founder and General Partner of Cierra Marine, LP and Crescent Terminals LLC, which owned inland marine tug and barges and a terminal located in the gulf coast. These companies were sold to a public MLP in July 2013.

Mr. Riedel was appointed to serve as a member of the Company’s board of directors on October 20, 2020. Mr. Riedel serves as the President of Apex Capital Investments for the Apex Heritage Group. He is responsible for The Apex Heritage Group’s Business Investments, Mergers & Acquisitions, Real Estate Investments & Activities, Deal Sourcing, Debt/Equity Financing, Capital Fundraising, Apex Strategic Planning, and various Philanthropic and Community Projects. Apex Heritage Group is a private firm that invests and manages small-to-mid-sized companies and real estate ventures located in the Southern US region and abroad. Apex focuses on identifying and growing entrepreneurial industrial manufacturing and services companies and diversifying overall investment holdings. Mr. Riedel has been with the Apex Heritage Group since 2012 and prior to his position with Apex Heritage Group, he was involved in several investment and leadership roles related to commercial development, family office, and the healthcare industry. Additionally, Mr. Riedel has been involved and served on numerous non-profit and for-profit boards for more than 25 years.

Mr. Frye was appointed to serve as a member of the Company’s board of directors on October 20, 2020. Mr. Frye founded each of 5J Oilfield Services LLC in November 2009 and 5J Trucking LLC in January 2004.    He has been involved in the oilfield trucking industry for more than thirty-five years.  Mr. Frye served as President and as the direct or indirect owner of one hundred percent of both 5J Oilfield Services LLC and 5J Trucking LLC until he sold both entities to the Company in February 2020.

Mr. Dorsett was appointed to serve as a member of the Company’s board of directors on November 8, 2021. Mr. Dorsett has over 40 years of experience in the oil and gas industry as an operator, investor and mineral owner. Additionally, Mr. Dorsett has significant experience in various other industries including real estate, oil & gas services, solar and wind energy investments. Mr. Dorsett has been the President and managing member of LouTex Production Company since September 1990. As an entrepreneur and business person, Mr. Dorsett founded Marshall Properties, Inc., LouTex, Trinity Services LLC, Diamond Drilling and various other start-ups past and present. Mr. Dorsett is the proprietor of The Remington Suite Hotel and Spa located in Shreveport, Louisiana. Mr. Dorsett owns and operates extensive farming operations in Southwest Arkansas. Mr. Dorsett has several philanthropic interests serving on Boards, past and present, of Shreveport’s Downtown Development Authority, Christus Highland Foundation, Biomedical Research Foundation, Shreveport/Bossier Rescue Mission. He also served 25 years on the Harrison County Texas Soil & Water Conservation Board. Mr. Dorsett also currently serves on the Louisiana Public Broadcasting Board and is currently President-elect. Mr. Dorsett received a Bachelors of Business Administration and Bachelor of Fine Arts from Southern Methodist University in 1978. He additionally attended Centenary College Executive MBA Program in 1987.

Director Independence and Qualifications

The Board of Directors has determined that each of Messrs. Page, Crosswell and Riedel qualify as an “independent director.” Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the Company or any other individual having a relationship with the Company that, in the opinion of the Company’s Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be independent if:

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The Board believes that the qualifications of the Directors, as set forth in their biographies which are listed above and briefly summarized in this section, gives them the qualifications and skills to serve as a Director of our Company. All of our directors have strong business backgrounds. The Board also believes that each of the Directors has other key attributes that are important to an effective Board: integrity and demonstrated high ethical standards; sound judgment; analytical skills; the ability to engage management and each other in a constructive and collaborative fashion and the commitment to devote significant time and energy to service on the Board and its Committees.

Involvement in Certain Legal Proceedings

Except as set forth below, none of our Directors or executive officers has, during the past ten years:

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Mr. Flemming was an executive officer of HII Technologies, Inc. (“HII”) in 2016. Subsequent to his employment with HII, that company entered into a plan of reorganization under Chapter 11.

Family Relationships

There are no family relationships among the individuals comprising our Board of Directors, management and other key personnel.

Board Composition

Our certificate of incorporation, as amended, and bylaws provide that the authorized number of Directors may be changed only by resolution of the Board. We currently have seven Directors with each Director serving a one-year term which will expire at our next annual meeting of stockholders. At each annual meeting of stockholders, the successors to the current Directors will be elected to serve until the next annual meeting following the election.

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Board Committees

We have not appointed any of the members of our board of directors to any of our board committees. Our entire Board currently performs the functions of each of the Audit Committee, Nominating and Governance Committee and the Compensation Committee. Each of the Audit Committee, Nominating and Governance Committee, and a Compensation Committee, are described below. All standing committees operate under charters that have been approved by the Board. Copies of the charters of the Audit Committee, Compensation Committee and the Nominating and Governance Committee can be found on our Internet site www.SMGIndustries.com

Audit Committee.  At such time as we appoint members to our Audit Committee, our Audit Committee will oversee our corporate accounting, financial reporting practices and the annual audit and quarterly reviews of the financial statements. For this purpose the Audit Committee has a charter (which is reviewed periodically) and is designed to perform several functions.

The Audit Committee’s primary functions will be to:

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Compensation Committee. At such time as we appoint members of our board of directors to the Compensation Committee, the Compensation Committee primary functions will be to:

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Decisions regarding executive compensation are ultimately determined by the Board upon recommendations of the Compensation Committee, which reviews a number of factors in its decisions, including market information about the compensation of executive officers at similar-sized companies within our industry and geographic region, and recommendations from our Chief Executive Officer. The Compensation Committee may consult external compensation consultants to assist with the recommendation of executive compensation.

Non-executive director compensation is determined by the entire Board after review and approval by the Compensation Committee.

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Nominating and Governance Committee. The Nominating and Governance Committee has a charter, which is reviewed periodically.

Our Nominating and Governance Committee’s primary functions will be to:

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The Nominating and Governance Committee recommends to the Board candidates for nomination to the Board. When considering individuals to recommend for nomination as Directors, our Nominating and Governance Committee seeks persons who possess the following characteristics: integrity, education, commitment to the Board, business judgment, relevant business experience, diversity, reputation, and high-performance standards. While the Board values a diversity of viewpoints and backgrounds, it does not have a formal policy regarding the consideration of diversity in identifying director nominees. The Nominating and Governance Committee may engage the services of third-party search firms to assist in identifying and assessing the qualifications of Director candidates.

The Nominating and Governance Committee will consider recommendations for Director candidates from stockholders, provided that the stockholder submits the Director nominee and reasonable supporting material concerning the nominee by the due date for a stockholder proposal to be included in the Company’s Proxy Statement for the applicable annual meeting as set forth in Section 2.14 of the Company’s Bylaws and the rules of the SEC then in effect.

The Nominating and Governance Committee will consider properly and timely submitted Director candidates recommended by stockholders of the Company. Stockholders who wish to suggest qualified candidates for election to the Board should write to 20475 State Hwy 249, Suite 450, Houston, Texas 77070 Attn: President. These recommendations should include detailed biographical information concerning the nominee, his or her qualifications to be a member of the Board and a description of any relationship the nominee has to other stockholders of the Company. A written statement from the candidate consenting to be named as a candidate and, if nominated and elected, to serve as a Director should accompany any such recommendation.

Board Leadership Structure and Role in Risk Oversight

Our Board evaluates its leadership structure and role in risk oversight on an ongoing basis. Currently, Matthew Flemming serves as Chairman of the Board, Interim Chief Executive Officer, Interim Chief Financial Officer and Chief Business Development Officer. Our Board determines what leadership structure it deems appropriate based on factors such as the experience of the applicable individuals, the current business environment of the Company and other relevant factors. After considering these factors, our Board has determined that the role of Interim Chief Executive Officer, Interim Chief Financial Officer, Chief Business Development Officer and Chairman of the Board, is an appropriate Board leadership structure for our company at this time.

The Board is also responsible for oversight of our risk management practices, while management is responsible for the day-to-day risk management processes. This division of responsibilities is the most effective approach for addressing the risks facing the Company, and the Company’s Board leadership structure supports this approach. Through our Chief Executive Officer and other members of management, the Board receives periodic reports regarding the risks facing the Company. In addition, the Audit Committee assists the Board in its oversight role by receiving periodic reports regarding our risk and control environment.

Corporate Code of Conduct and Ethics

We have adopted a corporate Code of Conduct and Ethics which is reviewed annually. The text of our Code of Conduct and Ethics, which applies to our officers and each member of our Board, is posted in the “Corporate Governance” section of our website, www.SMGIndustries.com. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendments to, or waiver from, a provision of our Code of Conduct and Ethics by posting such information on our website, www.SMGIndustries.com. A copy of our Code of Conduct and Ethics is also available in print; free of charge, upon written request to 20475 State Hwy 249, Suite 450, Houston, Texas 77070, Attn: President.

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Executive Compensation

On October 1, 2017, we entered into an employment agreement with Mr. Flemming, formerly our Chief Executive Officer. Pursuant to the terms of the agreement, Mr. Flemming is paid an annual salary of $180,000 and receives health care insurance and other customary benefits. The initial term of the agreement is for a period of three years, with automatic three month extensions after the first term. In addition to Mr. Flemming’s base salary, Mr. Flemming is entitled to bonuses at the discretion of the Compensation Committee of the Board of Directors. On February 27, 2020, the Board agreed to pay Mr. Flemming $5,000 per month in exchange for providing a personal guarantee in connection with the Company notes, where payments shall be made until the termination of Mr. Flemming’s personal guarantees. Mr. Flemming waived this guarantee fee through December 31, 2020. In December 2020, Mr. Flemming agreed to a voluntary temporary salary reduction to an annual rate of $144,000 until June 2022, when it was restored to $180,000 per year.

On August 24, 2021, the Company’s board of directors appointed Alan Parrott to serve as the Chief Financial Officer of the Company. Through December 31, 2021, Mr. Parrott’s salary was $225,000 per annum and included customary company benefits. Commencing on January 1, 2022, Mr. Parrott’s compensation was revised to $3,000 per week for his services. Mr. Parrott ceased employment as an officer of the Company in March 2022.

From December 2020 to August 2021, Jeffrey Martini served as our Chief Executive Officer, however, we were not party to an employment agreement with Mr. Martini. Instead, APEX Heritage Group, Inc. (“Apex”) contracted directly with Mr. Martini for such management services, and is routinely compensated in turn via the provision of debt and/or equity instruments under the terms of an interim management services agreement, among other arrangements. During 2020, Apex was reimbursed via convertible debt valued at $225,000, which was in part compensation for such employment.

Certain Relationships and Related Transactions and Director Independence

The following is a description of the transactions we have engaged in since January 1, 2022, with our Directors and Officers and beneficial owners of more than five percent of our voting securities and their affiliates:

James E. Frye, who currently serves as a director on our Board and President of our 5J subsidiary owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the Company. These three leases located in Palestine, West Odessa and Floresville Texas all have similar five-year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the year ended December 31, 2022, we purchased $351,056 in rental services and have charged the crane company $60,000 that are included in our revenues. As of December 31, 2022, the Company owed $565,603 to and was owed $79,780 by the entity controlled by James Frye.

On January 6, 2022, Newton Dorsett, a member of our board of directors, loaned us $100,000 pursuant to a short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On January 6, 2022, Grey Fox Investments which is controlled by Brady Crosswell, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the loan to us in December 2021 of $150,000, totals $250,000. This note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 142,538 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.
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On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 375,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 14, 2022, James Frye, a member of our board of directors, loaned us $134,073 pursuant to a short term note that matured on March 31, 2022. Mr. Frye also received 201,110 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On March 3, 2022, Mr. Madden loaned us $450,000 pursuant to a short-term bridge note that matured on March 31, 2022. Mr. Madden also received 675,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

The Board of Directors has adopted a Related Party Transaction Policy for the review of related person transactions. Under these policies and procedures, the audit committee reviews related person transactions in which we are or will be a participant to determine if they are fair and beneficial to the Company. Financial transactions, arrangements, relationships or any series of similar transactions, arrangements or relationships in which a related person has or will have a material interest and that exceeds the lesser of: (i) $120,000, and (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, in the aggregate per year are subject to the audit committee’s review. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberation or vote requesting approval or ratification of the transaction. Transactions that are subject to the policy include any transaction, arrangement or relationship (including indebtedness or guarantees of indebtedness) in which the Company is a participant with a related person. The related person may have a direct or indirect material interest in the transaction. It is Company policy that the audit committee shall approve any related party transaction before the commencement of the transaction. However, if the transaction is not identified before commencement, it must still be presented to the audit committee for their review and ratification. For more information regarding related party transactions, see the section entitled “Certain Relationships and Related Transactions” below.

Director Independence

Our Board of Directors has determined that Messrs. Page, Crosswell and Riedel are “independent” as defined under the standards set forth in Rule 5605 of the NASDAQ Stock Market Rules. In making this determination, the Board of Directors considered all transactions set forth under “Certain Relationships and Related Transactions.”

Legal Proceedings

To the best of our knowledge, none of our Directors or Executive Officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree, or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in “Certain Relationships and Related Transactions,” none of our Directors, Director nominees, or Executive Officers has been involved in any transactions with us or any of our Directors, Executive Officers, affiliates, or associates which are required to be disclosed pursuant to the rules and regulations of the Commission.

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Summary Compensation Table

The following table shows the total compensation earned during the fiscal years ended December 31, 2022 and 2021 to (1) our Chief Executive Officer, and (2) our other named executive officers during the fiscal years ended December 31, 2022 and 2021 (collectively, the “named executive officers”):

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All compensation awarded to directors and executive officers are deliberated among, and approved by, the Compensation Committee and the Board.

Director Compensation

Director Compensation Table

During the year ended December 31, 2022, none of our non-executive independent directors received compensation for their Board service.

Cash Compensation of Directors

Members of our Board of Directors do not currently receive cash compensation for their services, however, the Board may in the future determine to compensate it members through the payment of cash compensation. We reimburse our non-employee directors for out-of-pocket expenses for attending such meeting.

Equity Compensation of Directors

Our independent directors are eligible to participate in our 2018 Stock Option Plan. During 2022, no members of our Board of Directors received any cash or equity consideration for their services.

Outstanding Equity Awards at 2022 Year End

Other than 1,000,000 options to purchase shares of our common stock held by Mr. Flemming at an exercise price of $0.30 per share, of which 944,444 were exercisable as of December 31, 2022, there are no outstanding unexercised options, unvested stock and equity incentive plan awards held by any of our executive officers as of December 31, 2022.

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The following table sets forth, as of March 31, 2023, information regarding the beneficial ownership of our common stock based upon the most recent information available to us for: (i) each person known by us to own beneficially five percent (5)% or more of our outstanding common stock, (ii) each of our officers and directors, and (iii) all of our officers and directors as a group. Unless otherwise indicated, each of the persons listed below has sole voting and investment power with respect to the shares beneficially owned by them. As of March 31, 2023, there were 47,739,284 shares of our common stock issued and outstanding. Except as otherwise listed below, the address of each person is 20475 State Hwy 249, Suite 450, Houston Texas 77070.

*less than one percent

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our directors, executive officers and persons who beneficially own more than ten percent of our common stock file with the SEC initial reports of their ownership of our common stock and reports of changes in such ownership.

Based solely upon a review of copies of Section 16(a) reports and representations received by us from reporting persons, and without conducting any independent investigation of our own, in 2022, we believe all of these filing requirements may not have been timely filed.

Equity Compensation Plan Information

The following table provides information with respect to our compensation plans under which equity compensation is authorized as of December 31, 2022.

2008 Long-Term Incentive Compensation Plan

In 2008, our Board adopted, and our stockholders approved the 2008 Long-Term Incentive Compensation Plan (“the Plan”). Under this plan, we may grant incentive stock options, non-qualified stock options restricted and unrestricted stock awards and other stock-based awards. The purpose of the Plan is to provide an incentive to attract directors, officers, consultants, advisors and employees whose services are considered valuable to encourage a sense of proprietorship and to stimulate an active interest of such person in our development and financial achievements. As amended in July 2010, a maximum of 1,000,000 shares of our common stock are authorized under the Plan. The Plan expired on January 31, 2018. Our Board has authorized our Compensation Committee to administer the Plan. In connection with the administration of the Plan, the Compensation Committee, with respect to awards to be made to any person who is not one of our directors, will:

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With respect to stock options or restricted stock awards to be made to any of our directors, the Compensation Committee will make recommendations to our Board as to:

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Any grant of awards to any directors under the Plan must be approved by our Board. In addition, the Compensation Committee will:

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Our Board may amend the Plan at any time. However, without stockholder approval, the Plan may not be amended in a manner that would:

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Awards previously granted under the Plan may not be impaired or affected by any amendment of the Plan, without the consent of the affected grantees.

Transferability

With the exception of Non-Qualified Stock Options, awards are not transferable other than by will or by the laws of descent and distribution. Non-Qualified Stock Options are transferable on a limited basis. Restricted stock awards are not transferable during the restriction period.

Change of Control Event

The Plan provides that in the event of a change of control the Board shall have the discretion to determine whether, and to what extent to, accelerate the vesting, exercise or payment of an Award.

Termination of Employment/Relationship

Awards granted under the Plan that have not vested will generally terminate immediately upon the grantee’s termination of employment or business relationship with us or any of our subsidiaries for any reason other than retirement with our consent, disability or death. The Board or a committee of the Board may determine at the time of the grant that an award agreement should contain provisions permitting the grantee to exercise the stock options for any stated period after such termination, or for any period the Board or a committee of the Board determines to be advisable after the grantee’s employment or business relationship with us terminates by reason of retirement, disability, death or termination without cause. Incentive Stock Options will, however, terminate no more than three months after termination of the optionee’s employment, twelve months after termination of the optionee’s employment due to disability and three years after termination of the optionee’s employment due to death. The Board or a committee of the Board may permit a deceased optionee’s stock options to be exercised by the optionee’s executor or heirs during a period acceptable to the Board or a committee of the Board following the date of the optionee’s death but such exercise must occur prior to the expiration date of the stock option.

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Dilution; Substitution

As described above, the Plan will provide protection against substantial dilution or enlargement of the rights granted to holders of awards in the event of stock splits, recapitalizations, asset acquisitions, consolidations, reorganizations or similar transactions. New award rights may, but need not, be substituted for the awards granted under our the Plan, or our obligations with respect to awards outstanding under the Plan may, but need not, be assumed by another corporation in connection with any asset acquisition, consolidation, acquisition, separation, reorganization, sale or distribution of assets, liquidation or like occurrence in which we are involved. In the event that the Plan is assumed, the stock issuable with respect to awards previously granted under the Plan shall thereafter include the stock of the corporation granting such new option rights or assuming our obligations under the Plan.

2018 Stock Option Plan

In January 2018, our board of directors and a majority of our stockholders approved and adopted the 2018 Stock Option Plan (“2018 Plan”). Under this plan, we may grant incentive stock options and non-qualified stock options. In February 2020, our board of directors approved an amendment to the 2018 Plan to increase the number of shares of common stock that may be issued under the 2018 Plan from 2,000,000 shares to 4,000,000 shares.

The Purpose of the Plan. The purpose of the 2018 Plan is to provide additional incentive to the directors, officers, employees and consultants of the Company who are primarily responsible for the management and growth of the Company. Each option shall be designated at the time of grant as either an incentive stock option (an “ISO”) or as a non-qualified stock option (a “NQSO”).

The Board of Directors believes that the ability to grant stock options to employees which qualify for ISO treatment provides an additional material incentive to certain key employees. The Internal Revenue Code requires that ISOs be granted pursuant to an option plan that receives stockholder approval within one year of its adoption. The Company adopted the Plan in order to comply with this statutory requirement and preserve its ability to grant ISOs.

The benefits to be derived from the 2018 Plan, if any, are not quantifiable or determinable.

Administration of the Plan. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Company (the “Administrator”). The Board of Directors shall appoint and remove members of the Compensation Committee in its discretion in accordance with applicable laws. In compliance with Rule 16b-3 under the Exchange Act and Section 162(m) of the Internal Revenue Code (the “Code”), the Compensation Committee shall, in the Board of Director’s discretion, be comprised solely of “non-employee directors” within the meaning of said Rule 16b-3 and “outside directors” within the meaning of Section 162(m) of the Code. Notwithstanding the foregoing, the Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems proper and the Board of Directors, in its absolute discretion, may at any time and from time to time exercise any and all rights and duties of the Administrator under the Plan.

Subject to the other provisions of the Plan, the Administrator shall have the authority, in its discretion: (i) to grant options; (ii) to determine the fair market value of the Common Stock subject to options; (iii) to determine the exercise price of options granted; (iv) to determine the persons to whom, and the time or times at which, options shall be granted, and the number of shares subject to each option; (v) to interpret the Plan; (vi) to prescribe, amend, and rescind rules and regulations relating to the Plan; (vii) to determine the terms and provisions of each option granted (which need not be identical), including but not limited to, the time or times at which options shall be exercisable; (viii) with the consent of the optionee, to modify or amend any option; (ix) to defer (with the consent of the optionee) the exercise date of any option; (x) to authorize any person to execute on behalf of the Company any instrument evidencing the grant of an option; and (xi) to make all other determinations deemed necessary or advisable for the administration of the Plan. The Administrator may delegate non-discretionary administrative duties to such employees of the Company as it deems proper.

Shares of Stock Subject to the Plan. Subject to the conditions outlined below, the total number of shares of stock which may be issued under options granted pursuant to the Plan shall not exceed 4,000,000 shares of Common Stock, $.001 par value per share.

The number of shares of Common Stock subject to options granted pursuant to the Plan may be adjusted under certain conditions. If the stock of the Company is changed by reason of a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification, appropriate adjustments shall be made by the Board of Directors in (i) the number and class of shares of stock subject to the Plan, and (ii) the exercise price of each outstanding option; provided, however, that the Company shall not be

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required to issue fractional shares as a result of any such adjustments. Each such adjustment shall be subject to approval by the Board of Directors in its sole discretion.

In the event of the proposed dissolution or liquidation of the Company, the Administrator shall notify each optionee at least thirty days prior to such proposed action. To the extent not previously exercised, all options will terminate immediately prior to the consummation of such proposed action; provided, however, that the Administrator, in the exercise of its sole discretion, may permit exercise of any options prior to their termination, even if such options were not otherwise exercisable. In the event of a merger or consolidation of the Company with or into another corporation or entity in which the Company does not survive, or in the event of a sale of all or substantially all of the assets of the Company in which the Stockholders of the Company receive securities of the acquiring entity or an affiliate thereof, all options shall be assumed or equivalent options shall be substituted by the successor corporation (or other entity) or a parent or subsidiary of such successor corporation (or other entity); provided, however, that if such successor does not agree to assume the options or to substitute equivalent options therefor, the Administrator, in the exercise of its sole discretion, may permit the exercise of any of the options prior to consummation of such event, even if such options were not otherwise exercisable.

Participation. Every person who at the date of grant of an option is an employee of the Company or of any Affiliate (as defined below) of the Company is eligible to receive NQSOs or ISOs under the Plan. Every person who at the date of grant is a consultant to, or non-employee director of, the Company or any Affiliate (as defined below) of the Company is eligible to receive NQSOs under the Plan. The term “Affiliate” as used in the Plan means a parent or subsidiary corporation as defined in the applicable provisions (currently Sections 424(e) and (f), respectively) of the Code. The term “employee” includes an officer or director who is an employee of the Company. The term “consultant” includes persons employed by, or otherwise affiliated with, a consultant.

Option Price. The exercise price of a NQSO shall be not less than 85% of the fair market value of the stock subject to the option on the date of grant. To the extent required by applicable laws, rules and regulations, the exercise price of a NQSO granted to any person who owns, directly or by attribution under the Code (currently Section 424(d)), stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any Affiliate (a “10% Stockholder”) shall in no event be less than 110% of the fair market value of the stock covered by the option at the time the option is granted. The exercise price of an ISO shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value of the stock covered by the option at the time the option is granted. The exercise price of an ISO granted to any 10% Stockholder shall in no event be less than 110% of the fair market value of the stock covered by the Option at the time the Option is granted.

Term of the Options. The Administrator, in its sole discretion, shall fix the term of each option, provided that the maximum term of an option shall be ten years. ISOs granted to a 10% Stockholder shall expire not more than five years after the date of grant. The Plan provides for the earlier expiration of options in the event of certain terminations of employment of the holder.

Restrictions on Grant and Exercise. Except with the express written approval of the Administrator, which approval the Administrator is authorized to give only with respect to NQSOs, no option granted under the Plan shall be assignable or otherwise transferable by the optionee except by will or by operation of law. During the life of the optionee, an option shall be exercisable only by the optionee.

Termination of the Plan. The Plan shall become effective upon adoption by the Board of Directors; provided, however, that no option shall be exercisable unless and until written consent of the Stockholders of the Company, or approval of Stockholders of the Company voting at a validly called Stockholders’ meeting, is obtained within twelve months after adoption by the Board of Directors. If such Stockholder approval is not obtained within such time, options granted pursuant to the Plan shall be of the same force and effect as if such approval was obtained except that all ISOs granted pursuant to the Plan shall be treated as NQSOs. Options may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws. The Plan shall terminate within ten years from the date of its adoption by the Board of Directors.

Termination of Employment. If for any reason other than death or permanent and total disability, an optionee ceases to be employed by the Company or any of its Affiliates (such event being called a “Termination”), options held at the date of Termination (to the extent then exercisable) may be exercised in whole or in part at any time within three months of the date of such Termination, or such other period of not less than thirty days after the date of such Termination as is specified in the Option Agreement or by amendment thereof (but in no event after the expiration date of the option (the “Expiration Date”)); provided, however, that if such exercise of the option would result in liability for the optionee under Section 16(b) of the Exchange Act, then such three-month period automatically shall be extended until the tenth day following the last date upon which optionee has any liability under Section 16(b) (but in no event after the Expiration Date). If an optionee dies or becomes permanently and totally disabled (within the meaning of Section 22(e)(3) of

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the Code) while employed by the Company or an Affiliate or within the period that the option remains exercisable after Termination, options then held (to the extent then exercisable) may be exercised, in whole or in part, by the optionee, by the optionee’s personal representative or by the person to whom the option is transferred by devise or the laws of descent and distribution, at any time within twelve months after the death or twelve months after the permanent and total disability of the optionee or any longer period specified in the Option Agreement or by amendment thereof (but in no event after the Expiration Date). “Employment” includes service as a Director or as a Consultant. For purposes of the Plan, an optionee’s employment shall not be deemed to terminate by reason of sick leave, military leave or other leave of absence approved by the Administrator, if the period of any such leave does not exceed 90 days or, if longer, if the optionee’s right to reemployment by the Company or any Affiliate is guaranteed either contractually or by statute.

Amendments to the Plan. The Board of Directors may at any time amend, alter, suspend or discontinue the Plan. Without the consent of an optionee, no amendment, alteration, suspension or discontinuance may adversely affect outstanding options except to conform the Plan and ISOs granted under the Plan to the requirements of federal or other tax laws relating to ISOs. No amendment, alteration, suspension or discontinuance shall require stockholder approval unless (i) stockholder approval is required to preserve incentive stock option treatment for federal income tax purposes or (ii) the Board of Directors otherwise concludes that stockholder approval is advisable.

Tax Treatment of the Options. Under the Code, neither the grant nor the exercise of an ISO is a taxable event to the optionee (except to the extent an optionee may be subject to alternative minimum tax); rather, the optionee is subject to tax only upon the sale of the Common Stock acquired upon exercise of the ISO. Upon such a sale, the entire difference between the amount realized upon the sale and the exercise price of the option will be taxable to the optionee. Subject to certain holding period requirements, such difference will be taxed as a capital gain rather than as ordinary income. Optionees who receive NQSOs will be subject to taxation upon exercise of such options on the spread between the fair market value of the Common Stock on the date of exercise and the exercise price of such options. This spread is treated as ordinary income to the optionee, and the Company is permitted to deduct as an employee expense a corresponding amount. NQSOs do not give rise to a tax preference item subject to the alternative minimum tax.

New Plan Benefits

Future grants and awards under the 2018 Plan, which may be made to Company executive officers, directors, consultants and other employees, are not presently determinable.

Information Regarding Options Granted

No grants and awards under the 2018 Plan have been made to Company executive officers, directors, consultants and other employees. Such grants and awards will be made at the discretion of the Compensation Committee or the Board of Directors in accordance with the compensation policies of the Compensation Committee.

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The following is a description of the transactions we have engaged in since January 1, 2022, with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates:

James E. Frye, who currently serves as a director on our Board and President of our 5J subsidiary owns or has control over 5J Properties LLC, an entity that is the lessor to three leases with the Company. These three leases located in Palestine, West Odessa and Floresville Texas all have similar five-year terms with options for renewal. The current monthly rent for these leases totals approximately $14,250. James Frye is an owner of a southwest based crane rental company that we use as a vendor and is a customer from time to time. During the year ended December 31, 2022, we purchased $351,056 in rental services and have charged the crane company $60,000 that are included in our revenues. As of December 31, 2022, the Company owed $565,603 to and was owed $79,780 by the entity controlled by James Frye.
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On January 6, 2022, Newton Dorsett, a member of our board of directors, loaned us $100,000 pursuant to a short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

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On January 6, 2022, Grey Fox Investments which is controlled by Brady Crosswell, a member of our board of directors, loaned us $100,000 pursuant to a short term bridge note, that along with the loan to us in December 2021 of $150,000, totals $250,000. This note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On January 7, 2022, Mr. Madden loaned us $100,000 pursuant to short term note, that along with the initial loan to us in December 2021 of $150,000, totals $250,000. This bridge note matured on January 31, 2022 and pays a 12% per annum interest rate. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 11, 2022, Mr. Madden loaned us $95,025 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 142,538 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 14, 2022, Mr. Madden loaned us $250,000 pursuant to a short term note that matured on March 31, 2022. Mr. Madden also received 375,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On February 14, 2022, James Frye, a member of our board of directors, loaned us $134,073 pursuant to a short term note that matured on March 31, 2022. Mr. Frye also received 201,110 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

On March 3, 2022, Mr. Madden loaned us $450,000 pursuant to a short-term bridge note that matured on March 31, 2022. Mr. Madden also received 675,000 shares issued in the first quarter 2022 as an equity incentive in connection with this note. On August 3, 2022, this note was amended to a revised maturity date of December 31, 2022. In January 2023 the note was extended to June 30, 2023.

The Board of Directors has adopted a Related Party Transaction Policy for the review of related person transactions. Under these policies and procedures, the audit committee reviews related person transactions in which we are or will be a participant to determine if they are fair and beneficial to the Company. Financial transactions, arrangements, relationships or any series of similar transactions, arrangements or relationships in which a related person has or will have a material interest and that exceeds the lesser of: (i) $120,000, and (ii) one percent of the average of the Company’s total assets at year end for the last two completed fiscal years, in the aggregate per year are subject to the audit committee’s review. Any member of the Audit Committee who is a related person with respect to a transaction under review may not participate in the deliberation or vote requesting approval or ratification of the transaction. Transactions that are subject to the policy include any transaction, arrangement or relationship (including indebtedness or guarantees of indebtedness) in which the Company is a participant with a related person. The related person may have a direct or indirect material interest in the transaction. It is Company policy that the audit committee shall approve any related party transaction before the commencement of the transaction. However, if the transaction is not identified before commencement, it must still be presented to the audit committee for their review and ratification. For more information regarding related party transactions, see the section entitled “Certain Relationships and Related Transactions” below.

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In September 2017, the Audit Committee of the Board approved the appointment of the firm of MaloneBailey, LLP (“MaloneBailey”) to serve as our independent registered public accountant. The Audit Committee may consider whether it is appropriate, either for this fiscal year or in the future, to consider the selection of other independent registered public accounting firms.

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Audit Fees. The following table summarizes fees payable for services provided to us by our independent registered public accounting firm, which were pre-approved by the Audit Committee:

(1)Audit fees include fees for professional services by MaloneBailey in 2022 and 2021 rendered for the audits of the financial statements of the Company, quarterly reviews, consents and assistance with the review of documents filed with the SEC.

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(2)Tax fees include fees for tax services, including tax compliance.

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The Audit Committee of the Board has established its preapproval policies and procedures, pursuant to which the Audit Committee approves audit and tax services provided by our independent auditors. Consistent with the Audit Committee’s responsibility for engaging our independent auditors, all audit and permitted non-audit services require pre-approval by the Audit Committee. The full Audit Committee approves proposed fee estimates for these services. Pursuant to these procedures, the Audit Committee approved the foregoing audit and tax services provided by Malone.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

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(a)Documents filed as part of this Report

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(1)Financial Statements:

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(2)Financial Statement Schedules. All schedules are omitted because they are inapplicable, or not required, or the information is shown in the financial statements or notes thereto.

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(3)Exhibits:

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

SMG Industries, Inc.

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Opinion on the Financial Statements

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We have audited the accompanying consolidated balance sheets of SMG Industries, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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Going Concern Matter

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The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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Basis for Opinion

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These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

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Critical Audit Matters

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Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

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/s/ MaloneBailey, LLP

www.malonebailey.com

We have served as the Company's auditor since 2017.

Houston, Texas

April 17, 2023

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SMG INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

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The accompanying notes are an integral part of these consolidated financial statements.

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SMG INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2022 and 2021

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